Chapter 1

Global economic outlook

Prospects for the world economy in 2013-2014

Risk of a synchronized global downturn

The world economy continues to struggle with post-crisis adjustments

Four years after the eruption of the global financial crisis, the world economy is still struggling to recover. During 2012, global economic growth has weakened further. A growing number of developed economies have fallen into a double-dip recession. Those in severe sovereign debt distress moved even deeper into recession, caught in the downward spiralling dynamics from high unemployment, weak aggregate demand compounded by fiscal austerity, high public debt burdens, and financial sector fragility. Growth in the major developing countries and economies in transition has also decelerated notably, reflecting both external vulnerabilities and domestic challenges. Most low-income countries have held up relatively well so far, but now face intensified adverse spillover effects from the slowdown in both developed and major middle-income countries. The prospects for the next two yearscontinue to be challenging, fraught with major uncertainties and risksslanted towards the downside.

The global slowdown will put additional strains on developing countries

Conditioned on a set of assumptions in the United Nations baseline forecast (box I.1), growth of world gross product (WGP) is expected to reach 2.2 percent in 2012 and is forecast to remain well below potential at 2.4 percent in 2013 and 3.2 percent in 2014 (table I.1 and figure I.1). At this moderate pace, many economies will continue to operate below potential and will not recover the jobs lost during the Great Recession.

The slowdown is synchronized across countries of different levels of development (figure I.2). For many developing countries, the global slowdown will imply a much slower pace of poverty reduction and narrowing of fiscal space for investments in education, health, basic sanitation and other critical areas needed for accelerating the progress to achieve the Millennium Development Goals (MDGs). This holds true in particular for the least developed countries (LDCs); they remain highly vulnerable to commodity price shocks and are receiving less external financing as official development assistance (ODA) declines in the face of greater fiscal austerity in donor countries (see below).

Conditions vary greatly across LDCs, however. At one end of the spectrum, countries that went through political turmoil and transition, like Sudan and Yemen, experienced major economic adversity during 2010 and 2011, while strong growth performances continued in Bangladesh and a fair number of African LDCs (box I.2).

Weakness in developed economies underpins the global slowdown

Weaknesses in the major developed economiesare at the root of continued global economic woes. Most of them, but particularly those in Europe, are dragged into a downward spiral as high unemployment, continued deleveraging by firms and households, continued banking fragility, heightened sovereign risks, fiscal tightening, and slower growth viciously feedinto one another (figure I.3a).

Several European economies are already in recession. In Germany, output has also slowed significantly, while France’s economy is stagnating. A number of new policy initiatives were taken by the euro area authorities in 2012, including the Outright Monetary Transactions (OMT) programme and steps towards greater fiscal integration and coordinated financial supervision and regulation.

Thesee measures address some of the deficiencies in the original design of the Economic and Monetary Union (EMU).Significant as they may be, however, these measuresare still being counteractedby other policy stances, fiscal austerity in particular, and are not sufficient to break economies out of the vicious circle and restore output and employment growth in the short run (figure I.3b). In the baselineoutlook for the euro area, GDP is expected to grow by only 0.3 percent in 2013 and 1.4 percent in 2014, a feeble recovery from a decline of 0.5 percent in 2012. Because of the dynamics of the vicious circle, the risk for a much worse scenario remains high. Economic growth in the new European Union (EU) membersalso decelerated during 2012, with some, including the Czech Republic, Hungary and Slovenia, falling back into recession.

Worsening external conditionsare compounded byfiscal austerity measures, aggravating short-term growth prospects.In the outlook, GDP growthin these economiesis expected to remain subdued at 2.0 percent in 2013 and 2.9 percent in 2014, but risks are high for a much worse performanceif the situation in the euro areadeteriorates further.

Table I.1

Growth of world output, 2006-2014

Annual percentage change

Table I.1

Annual percentage change

Growth of world output, 2006-2014

Change from June 2012 forecastd

2006-2009a

2010

2011b

2012c

2013c

2014c

2012

2013

World

1.1

4.0

2.7

2.2

2.4

3.2

-0.3

-0.7

Developed economies

-0.4

2.6

1.4

1.1

1.1

2.0

-0.1

-0.7

United States of America

-0.5

2.4

1.8

2.1

1.7

2.7

0.0

-0.6

Japan

-1.5

4.5

-0.7

1.5

0.6

0.8

-0.2

-1.5

European Union

-0.3

2.1

1.5

-0.3

0.6

1.7

-0.3

-0.6

EU-15

-0.5

2.1

1.4

-0.4

0.5

1.6

-0.3

-0.6

New EU members

2.1

2.3

3.1

1.2

2.0

2.9

-0.5

-0.8

Euro area

-0.4

2.1

1.5

-0.5

0.3

1.4

-0.2

-0.6

Other European countries

0.9

1.9

1.7

1.7

1.5

1.9

0.6

0.2

Other developed countries

1.2

2.8

2.4

2.3

2.0

3.0

0.0

-0.6

Economies in transition

2.2

4.4

4.5

3.5

3.6

4.2

-0.5

-0.6

South-Eastern Europe

1.6

0.4

1.1

-0.6

1.2

2.6

-1.2

-0.6

Commonwealth of Independent States and Georgia

2.2

4.8

4.8

3.8

3.8

4.4

-0.5

-0.6

Russian Federation

1.7

4.3

4.3

3.7

3.6

4.2

-0.7

-0.8

Developing economies

5.2

7.7

5.7

4.7

5.1

5.6

-0.6

-0.7

Africa

4.7

4.7

1.1

5.0

4.8

5.1

0.8

0.0

North Africa

4.2

4.1

-6.0

7.5

4.4

4.9

3.1

0.0

Sub-Saharan Africa

5.0

5.0

4.5

3.9

5.0

5.2

-0.2

0.0

Nigeria

6.6

7.8

7.4

6.4

6.8

7.2

0.1

0.0

South Africa

2.5

2.9

3.1

2.5

3.1

3.8

-0.3

-0.4

Others

6.3

5.5

4.4

3.9

5.5

5.3

-0.3

0.1

East and South Asia

7.1

9.0

6.8

5.5

6.0

6.3

-0.8

-0.8

East Asia

7.2

9.2

7.1

5.8

6.2

6.5

-0.7

-0.7

China

11.0

10.3

9.2

7.7

7.9

8.0

-0.6

-0.6

South Asia

6.4

8.3

5.8

4.4

5.0

5.7

-1.2

-1.1

India

7.3

9.6

6.9

5.5

6.1

6.5

-1.2

-1.1

Western Asia

2.3

6.7

6.7

3.3

3.3

4.1

-0.7

-1.1

Latin America and the Caribbean

2.5

6.0

4.3

3.1

3.9

4.4

-0.5

-0.3

South America

3.9

6.5

4.5

2.7

4.0

4.4

-0.9

-0.4

Brazil

3.6

7.5

2.7

1.3

4.0

4.4

-2.0

-0.5

Mexico and Central America

-0.1

5.4

4.0

4.0

3.9

4.6

0.6

0.0

Mexico

-0.6

5.5

3.9

3.9

3.8

4.6

0.5

-0.1

Caribbean

3.6

3.5

2.7

2.9

3.7

3.8

-0.4

-0.3

By level of development

High-income countries

-0.2

2.9

1.6

1.2

1.3

2.2

Upper middle income countries

5.3

7.4

5.8

5.1

5.4

5.8

Lower middle income countries

5.8

7.4

5.6

4.4

5.5

6.0

Low-income countries

5.9

6.6

6.0

5.7

5.9

5.9

Least developed countries

7.2

5.8

3.7

3.7

5.7

5.5

-0.4

0.0

Memorandum items

World tradee

-0.3

13.3

7.0

3.3

4.3

4.9

-0.8

-1.2

World output growth with PPP-based weights

2.3

5.0

3.7

3.0

3.3

4.0

-0.4

-0.7

2006-2009a

2010

2011b

2012c

2013c

2014c

2012

2013

Growth of world output, 2006-2014

Change from June 2012 forecastd

a

Average percentage change.

b

Actual or most recent estimates.

c

Forecast, based in part on Project LINK and baseline projections of the UN/DESA World Economic Forecasting Model.

d

See United Nations, World Economic Situation and Prospects as of mid-2012 (E/2012/72).

e

Includes goods and services.

Source:

UN/DESA

----

Figure I.1
Growth of world gross product, 2006-2014a

Source: UN/DESA.
a Growth rate for 2012 is partially estimated.
Estimates for 2013 and 2014 are forecasts.
See “Uncertainties and risks” section for a discussion of the downside scenario and box I.3 for a discussion of the policy scenario.

Figure I.2
Growth of GDP per capita by level of development, 2000-2014

Source: UN/DESA.
a Estimates.
b United Nations
forecasts

Box
I.1

Major
assumptions for the baseline forecast

The forecast presented in the text is based on estimates calculated using the United Nations World Economic Forecasting Model (WEFM) and is informed by country-specific economic outlooks provided by participants in Project LINK, a network of institutions and researchers supported by the Department of Economic and Social Affairs of the United Nations. The provisional individual country forecasts submitted by country experts are adjusted based on harmonized global assumptions and the imposition of global consistency rules (especially for trade flows, measured in both volume and value) set by the WEFM. The main global assumptions are discussed below and form the core of the baseline forecast—the scenario that is assigned the highest probability of occurrence. Alternative scenarios are presented in the sections on “Uncertainties and risks” and “Policy challenges”. Those scenarios are normally assigned lower probability than the baseline forecast.

Monetary
policy

The
Federal Reserve of the United States (Fed) is assumed to keep the federal funds interest rate at the current low level of between 0.00 and 0.25 percent until mid-2015. It is assumed that the Fed will purchase agency mortgage-backed securities at a pace of $40 billion per month until the end of 2014, and will also continue its programme to extend the average maturity of its securities holdings through the end of 2012, as well as reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities.

The
European Central Bank (ECB) is assumed to cut the minimum bid and marginal lending facility rates by another 25 basis points, leaving the deposit rate at 0 percent. It is also assumed that the ECB
will start to implement the announced new policy initiative, Outright Monetary Transactions (OMT), to purchase the government bonds of Spain and a few selected members of the euro area. The Bank of Japan (BoJ) will keep the policy interest rate at the current level (0.0-0.1 percent) and implement the Asset
Purchase Program, with a ceiling of ¥91 trillion, as announced. With regard to major emerging economies, the People’s
Bank of China (PBC) is expected to reduce reserve requirement rates twice in 2013 and reduce interest rates one more time in the same period.

Fiscal
policy

In
the United States, it is assumed that the 2 percent payroll tax cut and emergency unemployment insurance benefits are extended for 2013, to be phased out gradually over several years. It is also assumed that the automatic spending cuts now scheduled to begin in January 2013 will be delayed, giving more time for the new Congress and president to produce a package of spending cuts and tax increases effective in 2014. The Bush tax cuts are assumed to be extended for 2013-2014. As a result, real federal government spending on goods and services will fall about 3.0 percent in 2013 and 2014, after a fall of about 2.5 percent in the previous two years. In
the euro area, fiscal policy is assumed to be focused on reducing fiscal imbalances.The majority of countries remain subject to the Excessive Deficit Procedure (EDP) under which they must submit plans to bring their fiscal deficits close to balance within a specified time frame. Typically, a
minimum correction of 0.5 percent per annum is expected, and the time frames range from 2012 to 2014. The time periods for achieving these targets will be extended in the most difficult cases. It
is also assumed that in the event that tensions increase in sovereign debt markets, affected euro area countries will seek assistance from the rescue fund, thus activating the new OMT programme of the ECB. It is assumed that this will allow increases in bond yields to be contained and that the policy conditionality attached to the use of OMT finance will not entail additional fiscal austerity; rather, Governments requesting funds will be pressed to fully implement already announced fiscal consolidation measures. In
Japan, the newly ratified bill to increase the consumption tax rate from its current level of 5 percent to 8 percent by April 2014 and to 10 percent by October 2015 will be implemented.Real government expenditure, including investment, is assumed to decline by a small proportion in 2013-2014, mainly owing to phasing out of reconstruction spending. In China, the Government is assumed to maintain a proactive fiscal policy stance, with an increase in public investment spending on infrastructure in 2013.

Exchange
rates among major currencies

It is assumed that during the forecasting period of 2013-2014, the euro will fl uctuate about $1.28 per euro. The Japanese yen is assumed to average about ¥80 per United States dollar, and the renminbi will average CNY6.23 per United States dollar.

Oil
prices

Oil prices (Brent) are assumed to average about $105 per barrel (pb) in 2013-2014, compared to $110 pb in 2012.

Sorce:

World Economic Situation and Prospects 2013 Global outlook

Growth in the United States will slow, with significant downside risks

The United States economyweakened notably during 2012, and growth prospects for 2013 and 2014 remain sluggish. On the up side, the beleaguered housing sector is showing some nascent signs of recovery. Further support is expected from the new round of quantitative easing (QE) recently launched by the United States Federal Reserve (Fed) whereby monetary authorities will continue to purchase mortgage-backed securities until the employment situation improves substantially. On the down side, the lingering uncertainties about the fiscal stance continue to restrain growth of business investment. External demand is also expected to remain weak. In the baseline outlook, gross domestic product (GDP) growth in the United States is forecast to decelerate to 1.7 percent in 2013 from an already anaemic pace of 2.1 percent in 2012. Risks remain high for a much bleaker scenario, emanating from the “fiscal cliff ” which would entail a drop in aggregate demand of as much as 4 percent of GDP during 2013 and 2014 (see “Uncertainties and risks” section).

Adding to the alreadysombre scenario are anticipated spillover effects from possible intensification of the euro area crisis, a “hard landing” of the Chinese economy and greater weakeningof other major developing economies.

The need for fiscal consolidation will reduce growth in Japan

Economic growth in Japan in 2012 was up from a year ago, mainly driven by reconstruction works and recovery from the earthquake-related disasters of 2011. The Government also took measures to stimulate private consumption. Exports faced strong headwinds from the slowdown in global demand and appreciation of the yen. In the outlook, Japan’s economyis expected to slow given the phasing out of private consumption incentivescombined with a new measure increasing taxes on consumption, anticipated reductions in pension benefits, and government spending cuts. These measures responded to concerns about the extremely high level of public indebtedness. The impact of the greater fiscal austerity will be mitigated by reconstruction investments, which will continue but at a slower pace.

Box I.2

Prospects for the least developed countries

The economies of the least developed countries (LDCs) are expected to rebound in 2013. GDP growth is projected to average 5.7 percent in 2013, up from 3.7 percent in 2012. However, most of the rebound is expected to come from improvements in economic conditions in Yemen and Sudan, following notable contractions of both economies in the face of political instability during 2010 and 2011.

In per capita terms, GDP growth for LDCs is expected to accelerate from 1.3 percent in 2012 to 3.3 percent in 2013. While an improvement, at this rate welfare progress will remain well below the pace of 5.0 percent per annum experienced during much of the 2000s, prior to the world economic and financial crisis.

Economic performance varies greatly among LDCs, however. Numerous oil exporters such as Angola and Guinea will benefit from continued solid oil prices, propelling GDP growth to more than 7 percent and 4 percent, respectively, in 2013. LDCs with a predominant agricultural sector have seen volatile economic conditions. In Gambia, for example, where agriculture provides about one third of total output, poor crop conditions caused GDP to contract by 1.0 percent in 2012.

Much better harvests are expected to propel GDP growth to 6.2 percent. Such sharp swings in the overall economic performance create multiple problems for policymakers. The inherent uncertainty not only complicates the planning and design of economic policies, especially those of a longer-term nature, but it also threatens the implementation of existing policy plans owing to sudden dramatic changes in economic parameters. In addition, unforeseen crises create needs—in the form of shortterm assistance to farmers, for example—which divert scarce financial and institutional resources away from more structurally oriented policy areas. On the other hand, Ethiopia’s robust growth of the past few years is expected to come down slightly but remain strong, partly owing to its programme of developing the agricultural sector.

A number of LDCs have also seen solid investment and consumption, supported by sustained inflows of worker remittances. This applies, for example, to Bangladesh, whose growth rate will continue to exceed 6.0 percent in 2013 and 2014 despite a marked slowdown in external demand. Growth of remittance inflows to Bangladesh picked up to about 20 percent year on year in the second half of 2012, following a strong rise in overseas employment earlier in the year.

The outlook for LDCs entails several downside risks. A more pronounced deterioration in the global economic environment would negatively affect primary commodity exporters through falling terms of trade, while others may be affected by falling worker remittances. Falling aid flows are expected to limit external financing options for LDCs in the outlook.

GDP is forecast to grow at 0.6 per cent in 2013 and 0.8 per cent in 2014, down from 1.5 per cent in 2012.

Spillover effects from developed countries and domestic issues dampen growth in developing countrie

The economic woes of the developed countries are spilling over to developing countries and economies in transition through weaker demand for their exports and heightened volatility in capital flows and commodity prices. Their problems are also home-grown, however; growth in investment spending has slowed significantly, presaging a continued deceleration of future output growth if not counteracted by additional policy measures. Several of the major developing economies that have seen fast growth in recent decades are starting to face structural bottlenecks, including fi nancing constraints faced by local governments regarding investment projects in some sectors of the economy, and overinvestment leading to excess production capacity in others, as in the case of China (see “Uncertainties and risks” section).

Figure I.3a
The vicious cycle of developed economies

Figure I.3b
Feeble policy efforts to break the vicious cycle

Source: UN/DESA

On average, economies in Africa are forecast to see a slight moderation in output growth in 2013 to 4.8 percent, down from 5.0 percent in 2012. Major factors underpinning this continued growth trajectory include the strong performance of oil-exporting countries, continued fiscal spending in infrastructure projects, and expanding economic ties with Asian economies. However, Africa remains plagued by numerous challenges, including armed confl icts in various parts of the region. Growth of income per capita will continue, but at a pace considered insufficient to achieve substantial poverty reduction.
Infrastructure shortfalls are among the major obstacles to more dynamic economic development in most economies of the region.

The economies in developing Asia have weakened considerably during 2012 as the region’s growth engines, China and India, both shifted into lower gear. While a significant deceleration in exports has been a key factor for the slowdown, the effects of policy
tightening in the previous two years also linger. Domestic investment has softened markedly.

Both China and India face a number of structural challenges hampering growth (see below). India’s space for more policy stimulus seems limited. China and other countries in the region possess greater space for additional stimulus, but thus far have refrained from
using it. In the outlook, growth for East Asia is forecast to pick up mildly to 6.2 percent in 2013, from 5.8 percent estimated for 2012. GDP growth in South Asia is expected to average 5.0 percent in 2013, up from 4.4 percent of 2012, but still well below potential.

Contrasting trends are found in Western Asia. Most oil-exporting countries experienced robust growth supported by record-high oil revenues and government spending.

By contrast, economic activity weakened in oil-importing countries, burdened by higher import bills, declining external demand and shrinking policy space. As a result, oil-exporting and oil-importing economies are facing a dual track growth outlook. Meanwhile, social unrest and political instability, notably in the Syrian Arab Republic, continue to elevate the risk assessment for the entire region. On average, GDP growth in the region is expected to decelerate to 3.3 percent in 2012 and 2013, from 6.7 percent in 2011.GDP growth in Latin America and the Caribbean decelerated notably during 2012, led by weaker export demand. In the outlook, subject to the risks of a further downturn, the baseline projection is for a return to moderate economic growth rates, led by stronger economic performance in Brazil. For the region as whole, GDP growth is forecast to average 3.9 percent in the baseline for 2013, compared to 3.1 percent in 2012.

Among economies in transition, growth in the economies of the Commonwealth of Independent States (CIS) has continued in 2012, although it moderated in the second half of the year. Firm commodity prices, especially those of oil and natural gas, held up growth among energy-exporting economies, including Kazakhstan and the Russian Federation. In contrast, growth in the Republic of Moldova and Ukraine was adversely affected by the economic crisis in the euro area. The economies of small energy-importing countries in the CIS were supported by private remittances. In the outlook, GDP for the CIS is expected to grow by 3.8 percent in 2013, the same as in 2012. The prospects for most transition economies in South-Eastern Europe in the short run remain challenging, owing to their close ties with the euro area through trade and finance. In these economies, GDP growth is expected to average 1.2 percent in 2013, a mild rebound from the recession of 2012 when economies in the subregion shrank by 0.6 percent.

Lower greenhouse gas emissions, but far cry from “low-carbon” growth

Helped by weaker global economic growth, greenhouse gases (GHGs) emitted by the Annex I countries to the Kyoto Protocol are estimated to have fallen by about 2 percent per year during 2011-2012 (see annex table A.22). This reverses the 3 percent increase in GHG emissions by these countries in 2010. Emissions fell by 6 percent in 2009 along with the fallout in GDP growth associated with the Great Recession. With the more recent decline, GHG emission reductions among Annex I countries are back on the long-run downward trend. Given the further moderation in global economic growth, emissions by these countries are expected to decline further during 2013-2014.[1] As a group, Annex I countries have already achieved the target of the Kyoto Protocol to reduce emissions by at least 5 percent from 1990 levels during the 2008-2012 commitment period. Several important individual countries, however, such as the United States and Canada, are still to meet their own national targets. At the same time, GHG emissions in many developing countries are increasing at a rapid pace, such that globally, emissions continue to climb.

The world remains far from achieving its target for CO2 equivalent concentrations

In all, the world is far from being on track to reduce emissions to the extent considered necessary for keeping carbon dioxide (CO2) equivalent concentrations to less than 450 parts per million (consistent with the target of stabilizing global warming at a 2°C temperature increase, or less, from pre-industrial levels).[2] To avoid exceeding this limit, GHG emissions would need to drop by 80 percent by mid-century. Given current trends and even with the extension of the Kyoto Protocol, this is an unachievable target.

“Greener” growth pathways need to be created now, and despite large investment costs, they would also provide opportunities for more robust short-term recovery and global rebalancing (see “Policy challenges” and chapter II on the environmental costs of expanding trade through global value chains).

------

1 Projections are based on past trends in GDP growth and GHG emissions, accounting implicitly for the effects over time of policies aimed at decoupling (see notes to annex table A.22 for a description of the methodology). As far as the longer-term trends are concerned, the impact of more recent energy policy changes may not be adequately refl ected.

2 A recent study by PricewaterhouseCoopers notes that “since 2000, the rate of decarbonisation has averaged 0.8% globally, a fraction of the required reduction. From 2010 to 2011, global carbon intensity continued this trend, falling by just 0.7%. Because of this slow start, global carbon intensity now needs to be cut by an average of 5.1% a year from now to 2050…. This rate of reduction has not been achieved in any of the past 50 years”. (See PricewaterhouseCoopers LLP, “Too late for two degrees? Low carbon economy index 2012”, November 2012, pp. 2-3, available from

Job crisis continue

Unemployment remains high in developed economies

Unemployment remains elevated in many developed economies, with the situation in Europe being the most challenging. A double-dip recession in several European economies has taken a heavy toll on labour markets. The unemployment rate continued to climb to a record high in the euro area during 2012, up by more than one percentage point from one year ago.

Conditions are worse in Spain and Greece, where more than a quarter of the working population is without a job and more than half of the youth is unemployed. Only a few economies in the region, such as Austria, Germany,Luxembourg and the Netherlands, register low unemployment rates of about 5 percent. Unemployment rates in Central and Eastern Europe also edged up slightly in 2012, partly resulting from fiscal austerity. Japan’s unemployment rate retreated to below 5 percent. In the United States, the unemployment rate stayed above 8 percent for the most part of 2012, but dropped to just below that level from September onwards. However, the labour participation rate is at a record low, while the shares of longterm unemployment reached historic highs of 40.6 percent (jobless for 6 months or longer) and 31.4 percent (one year or longer). Long-term unemployment is also severein the EUand Japan, where four of each ten of the unemployed have been without a job for more than one year. For the group of developed countries as a whole, the incidence of long-term unemployment (over one year) stood at more than 35 percent by July 2012, affecting about 17 million workers. Such a prolonged duration of unemployment tends to have significant, long-lasting detrimental impacts on both the individuals who have lost their jobs and on the economy as a whole. The skills of unemployed workers deteriorate commensurate with the duration of their unemployment, most likely leading to lower earnings for those individuals who are eventually able to find new jobs. At the aggregate level, the higher the proportion of workers trapped in protracted unemployment, the greater the adverse impact on the productivity of the economy in the medium to long run.

Adequate job creation should be a key policy priority in developed economies.

If economic growth stays as anaemic in developed countries as projected in the baseline forecast, employment rates will not return to pre-crisis levels until far beyond 2016 (figure I.4).

The employment situation varies across developing countries

Figure I.4
Post-recession employment recovery in the United States, euro area and developed economies, 2007 (Q1)-2011 (Q2) and projections for 2012 (Q3)-2016 (Q4)

Source: UN/DESA, based on data from ILO and IMF.

Note: The chart shows percentage changes of total employment (as a moving average) with respect to prerecession peaks. Projections (dashed lines) are based on estimates of the output elasticity of employment (Okun’s law), following a similar methodology to that of ILO, World of Work Report 2011 (Geneva).

The employment situation varies significantly across developing countries, but the common challenges are to improve the quality of employment and reduce vulnerable employment as well as confront structural unemployment issues such as high youth unemployment and gender disparities in employment—all of which are key social and economic concerns in many developing countries.

Among developing countries, the unemployment rates in most economies in East Asia and Latin America have already retreated to, or dropped below, levels seen prior to the global financial crisis. The growth moderation in late 2011 and 2012 has so far not led to a discernible rise in the unemployment rate in these two regions — a positive sign, with the caveat that a rise in the unemployment rate would usually lag in an economic downturn. If the growth slowdown continues, the unemployment rate could be expected to increase significantly. In Africa, despite relatively strong GDP growth, the employment situation remains a major problem across the region, both in terms of the level of employment and the quality of jobs that are generated. Labour conflicts also constitute a major downside risk to the economic performance of the region. Gender disparity in employment remains acute in Africa as well as in South Asia. Women are facing unemployment rates at least double those of men in some African countries, and the female labour force participation rate in India and Pakistan is much lower than that of males. Social unrest in North Africa and West Asia has been caused in part by high unemployment, especially among youth. The related disruptions in economic activity, in turn, have further pushed up unemployment rates in some countries. Among economies in transition, the unemployment rate in the Russian Federation declined to a record low of 5.2 percent in August 2012, partly as a result of increased public spending, but also because of a shrinking active population. Notable job creation has also been recorded in Kazakhstan, but the unemployment rate has increased in Ukraine as a result of tighter fiscal policy and weaker external sector.

Inflation receding worldwide, but still a concern in some developing countrie

Inflation remains subdued in most developed economies...

Inflation rates remain subdued in most developed economies. Continuing large output gaps and downward pressure on wages in many countries are keeping Inflationary expectations low. Inflation in the United States moderated over 2012, down to about 2 percent from 3.1 percent in 2011. A further moderation in headline Inflation is expected in the outlook for 2013. In the euro area, headline Inflation, as measured by the Harmonized Index of Consumer Prices (HICP), continues to be above the central bank’s target of 2 percent. Core Inflation, which does not include price changes in volatile items such as energy, food, alcohol and tobacco, has been much lower at around 1.5 percent, with no evidence of upward pressures. In the outlook, Inflation is expected to drift down slowly. Inflation in the new EU members is also expected to lessen. Deflation continues to prevail in Japan, although the central bank has raised its Inflation target to boost Inflation expectations.

... and is receding in most developing countries, although still high in som

Inflation receded in a majority of developing countries during 2012, but remains stubbornly high in some. In the outlook, higher oil prices and some country-specific supply-side constraints may continue to put upward pressure on Inflation in developing countries in 2013 and into 2014. In Africa, while Inflation moderated in many economies, the rate of Inflation is still above 10 percent in Angola, Nigeria and elsewhere. Inflation is expected to remain subdued in most of East Asia, but is still a concern for most countries in South Asia where Inflation rates were, on average, over 11 percent in 2012 and are forecast to remain above or near 10 percent in 2013 and 2014. Inflation remains low in most economies in West Asia, though it is still high (above 10 per cent) in Yemen and very high (30 percent) in the Syrian Arab Republic. The Inflation rate in Latin America and the Caribbean is expected to stay at about 6 percent.

Outlook for global commodity and financial markets

World trade slowed notably during 2012, along with weaker global output. The sovereign debt crisis and economic recession in the euro area and continued financial deleveraging in most developed economiesaffected capital flows to emerging markets and other developing countries, adding to uncertainty about economic prospects and enhancing market volatility. These factors, combined with spillover effects of expansionary monetary policies in developed economies, have also fueled volatility in primary commodity prices and exchange rates. Global imbalances, characterized by large savings surpluses in some economies and deficits in others, have narrowed markedly in the aftermath of the global financial crisis. However, the rebalancing has hardly been a benign process, having resulted mainly from demand deflation and weaker trade flows.

Sharp slowdown of world trade

Declining import demand in Europe dampened world trade growth in 201

After plunging by more than 10 percent in the Great Recession of 2009, world trade rebounded strongly in 2010. Since 2011, the recovery of the volume of world exports has lost momentum (figure I.5). Growth of world trade decelerated sharply during 2012, mainly owing to declining import demand in Europe, as the region entered into its second recession in three years, and anaemic aggregate demand in the United States and Japan. Developing countries and economies in transition have seen demand for their exports weaken as a result.

The monthly trade data of different regions and countriesshowed a clear sequence of the weakening demand that originated in the euro areatransmitting to the rest of the world. Import demand in Greece, Italy, Portugal and Spain started to decline in late 2011 and fell further during 2012, but the weakness in trade activity has spread further to the rest of Europe as well, including France and Germany. In tandem, imports of the United States and Japan also slowedsignificantly in the second half of 2012.

East Asian economiesthat trade significantly with the major developed countrieshave experienced commensurate declines in exports. For example, the Republic of Korea, and Taiwan Province of Chinaregistered considerable drops in exports during 2012. China’s exports also decelerated notably. Further down the global value chain, energy and other primary-exporting economies have seen demand for their exports weaken as well. Brazil and the Russian Federation, for instance, all registered export declines in varying degrees in the second half of 2012. Lower export earnings, compounded by domestic demand constraints have also pushed down GDP growth in many developing countries and economies in transition during 2012. This has led to flagging import demand from these economies, further slowing trade of developed countries.

At the same time, a rise in international protectionism, albeit modest, and the protracted impasse in the world multilateral trade negotiations, have also adversely affected international trade flows.[3] In the outlook for 2013 and 2014, the continued weak global growth outlook and heightened uncertainties lead to expectations that world trade will continue to expand at a rather tepid pace of 4.3 percent in volume terms in 2013 and 4.9 percent in 2014, compared to 3.3 percent in 2012 and 6.8 percent during 2005-2008.

Oil prices soften but risk premium remain

The price of oil fluctuated during 2012 (figure I.6); weaker global demand tended to push prices down, while heightened geopolitical risks in several oil-producing countries put upward pressure on prices. Global oil demand decelerated somewhat to 0.9 percent in 2012. Global supply was affected by sanctions imposed by the EU and the United States on Syrian and Iranian oil exports. This was compensated to a large extent, however, by the preventive increase in oil production in Saudi Arabia, the resumption of production in Libya and higher-than-expected output in North America, Latin America and the Russian Federation. Yet, spare capacity dropped to 2.8 million barrels per day (mbd), down from an average of about 4 mbd during 2006-2011.

In the outlook, world oil demand is expected to remain subdued during 2013 and 2014. Supply is expected to further expand in several oil-producing areas, including North America, the Russian Federation and Brazil, partially off set by declines in the North Sea and Central Asia. Saudi Arabia is expected to lower production, thereby increasing spare capacity.

Continued geopolitical tensions in the Middle East will likely continue to put a risk premium on prices, however. As a result, Brent oil prices are forecast to decline somewhat and fl uctuate around $105 per barrel (pb) in 2013-2014, down from an average of $110 pb in 2012.

Rising food prices

Food prices increased to a record high, but will moderate in 2013

Despite slowing global demand, food prices jumped to a record high in July 2012 (figure I.7). Global cereal production in 2012 is expected to fall by 2.7 percent from previous year’s record crop. The overall decrease reflects a 5.5 percent reduction in wheat, and a 2.5 percent decline in coarse grains, while the global rice crop is seen to grow by 0.7 percent above last season’s record. Severe droughts and poor weather this year in the United States, the Russian Federation, Ukraine and Kazakhstan have been the main cause of the reduced maize and wheat crops. According to the Food and Agricultural Organization (FAO), the decline would also reduce the world cereal stock-to-use ratio from 22.6 percent in 2012 to 20.6 percent in 2013, which compares with the low of 19.2 percent registered in 2007-2008.[4]

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[4] Food and Agricultural Organization of the United Nations, “World cereal production in 2012 down 2.7 percent from the 2011 record”, FAO Cereal Supply and Demand Brief, 8 November 2012, available from http://www.fao.org/worldfoodsituation/wfs-home/csdb/en/.
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The situation is not yet considered a threat to global food security, however. In the outlook, food prices will likely moderate somewhat with slowing global demand. However, given that markets are very tight, even relatively minor supply shocks may easily cause new price spikes.

Softening non-food commodity price

Metal and ore prices will remain weak as a result of subdued demand

The prices of non-oil, non-food commodities started to decline in the second quarter of 2012 as a result of the slowdown in global demand (figure I.8). The appreciation of the United States dollar has also contributed to the weakness in the prices of non-food commodities, as these prices are dollar-denominated. Prices of base metals and ores continued their downward trend until mid-2012, before rebounding somewhat towards the end of the year, mainly influenced by financial factors (see chapter II). Global demand remained weak, while new mining projects implemented over the past decade have increased global supply.

Figure I.8
Non-oil commodity prices, 2000-2014

The prices of metals and ores are likely to remain weak, as global demand is not expected to pick up quickly during 2013. Market conditions are likely to remain volatile, however.

New rounds of monetary easing by major developed economiesin a context of continued financial fragility, for instance, would likely induce more speculative financial flows into commodity markets, thereby keeping prices up and bringing more volatility into the market.

Continued volatility of capital flows to emerging markets

Emerging markets will continue to experience volatile capital flows

Global financial vulnerabilities remain unabatedly high. Bank lending has remained sluggish across developed economies. Financial conditions are likely to remain very fragile over the near term because of the time it will take to implement a solution to the euro area crisis and the shadow being cast over the recovery of the United States economy by the fiscal cliff . Most emerging markets are likely to continue experiencing volatile capital flows as they have over the past few years, strongly influenced by fragility in financial markets and QE policies in developed countries (figure I.9).

For the year 2012, net private capital inflows to emerging markets —that is, selected developing countries and economies in transition—are estimated to reach about $1 trillion, down by about 10 percent from the previous year.[5] Next to ongoing deleveraging in developed countries, domestic factors specific to emerging market economies added to the downward pressure on net capital infl ows in the first half of 2012. Slower growth in China and a few other Asian economies has lowered exchange-rate adjusted rate-of-return expectations of international investors. In North Africa and the Middle East, uncertainties remain in the wake of political transformations and, in some cases, ongoing conflicts, creating an adverse environment for stronger capital infl ows. Several Latin American countries, such as Brazil, have introduced more rigorous capital account regulation to limit short-term capital inflows and mitigate capital-flow and exchange-rate volatility.

The costs of external borrowing financing increased for developing countries and economies in transition when the crisis in the euro area escalated in mid-2012, but have since decreased and remain low in general (figure I.10).

Net private capital inflows to emerging markets are not expected to increase by much on average in 2013, although volatility in markets would persist. New rounds of monetary easing announced by the central banks of developed countries are expected to provide some stabilizing impact on financial markets, which may help reduce risk aversion among investors. In view of the interest rate and growth differentials, investors are expected to retain interests in developing countries. At the same time, however, the continued need for deleveraging the bank system in developed countries keeps the risk of capital reversals high for emerging markets. Furthermore, uncertainties surround future growth prospects for some large developing economies (see “Uncertainties and risks” section), which could temper appetite for foreign investments in emerging markets.

Capital inflows continue to be accompanied by large scale capital outflows from emerging markets

Even though the degree of reserve accumulation was slightly less than in 2011, it signals continued concerns in emerging and developing country economies regarding world commodity and capital market volatility. While providing buffers against shocks and policy space to mitigate exchange-rate volatility, the massive reserve accumulation is also further weakening global demand. [6]

Net ODA flows from member countries of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) reached $133.5 billion in 2011, up from $128.5 billion in 2010. In real terms, however, this represented a fall of 3 percent, widening the delivery gap in meeting internationally agreed aid targets to $167 billion.[7] Preliminary results from the OECD survey of donors’ forward spending plans indicate that Country Programmable Aid (CPA)—a core subset of aid that includes programmes and projects, which have predicted trends in total aid—is expected to increase by about 6 percent in 2012, mainly on account of expected increases in outfl ows of soft loans from multilateral agencies that had benefi ted from earlier fund replenishments.

However, CPA is expected to stagnate from 2013 to 2015, reflecting the delayed impact of the global economic crisis on donor country fiscal budgets.

Continued exchange-rate volatility

Exchange rates between major currencies remained relatively calm in response to QE measures

A large depreciation of the euro vis-à-vis other major currencies was the defining trend in global foreign exchange markets for the first half of 2012 (figure I.11), driven by the escalation of the debt crisis in the euro area. The euro rebounded somewhat in the second half of the year after the European authorities announced some new initiatives, including the OMT programme. The exchange rates between major currencies remained relatively calm in response to announcements of the OMT and further QE by the European Central Bank (ECB) and the Fed. In the outlook, given announced monetary policies in major developed economies and their generally weak growth prospects, it is diffi cult to ascertain a clear trend in the exchange rates among the major currencies.

Figure I.11
Exchange rates of major currencies vis-à-vis the United States dollar, January 2002-October 2012
Inde:x 2, January 2002 =100
Euro
Japanese yen
Swiss franc
Source: UN/DESA, based on data from JPMorgan Chase

After a precipitous fall in late 2011, the first half of 2012 saw currencies in most developing countries and the economies in transition depreciating further against the United States dollar (figure I.12). This trend was driven by two main factors: the reduction in capital infl ows to these countries and the weaker growth prospects for these economies. Since mid-2012, the exchange rates of most of these currencies have stabilized, and some of them started to rebound after the launches of the new QE in major developed countries. In the outlook, continued implementation of the open-ended QE in major developed countries will likely increase the volatility in the exchange rates of the currencies of developing countries and the economies in transition.

Figure I.12
Exchange rates of selected developing country currencies vis-à-vis the United States dollar, January 2002-October 2012
Brazilian real
Korean won
South African rand

Source: UN/DESA, based on data from JPMorgan Chase.

No benign global rebalancing

External imbalances have fallen as a result of overall weakness in global demand

Global imbalances, which refers to the current-account imbalances across major economies, have narrowed significantly in the aftermath of the global crisis. Even if widening slightly during 2012, they remain much smaller than in the years leading up to the crisis (figure I.13). Unfortunately, this trend cannot be seen as a sign of greater global financial stability and more balanced growth. External imbalances have fallen as a result of overall weakness in global demand and the synchronized downturn in international trade rather than through more structural shifts in savings rates and demand patterns.

The United States remained the largest deficit economy, with an estimated external deficit of about $467 billion (3.1 percent of GDP) in 2012, down substantially External imbalances have fallen as a result of overall weakness in global demand from the peak of $800 billion (6 percent of GDP) registered in 2006. In mirror image, the external surpluses in China, Germany, Japan and a group of fuel-exporting countries have narrowed, albeit to varying degrees. China recorded an estimated surplus of slightly over 2 percent of GDP in 2012, a sharp decline from a high of 10 percent of GDP in 2007.

Japan is expected to register a surplus of 4 percent of GDP in 2012, also a signifi cant reduction from its peak level of 5.0 percent of GDP reached in 2007. While Germany’s surplus declined only slightly, remaining above 5 percent of GDP, the current account for the euro area as a whole turned from a deficit into a surplus of 1 percent of GDP. Large surpluses relative to GDP are still present in oil-exporting countries, reaching 20 percent of GDP or more in some of those in Western Asia.

The larger part of the adjustment reflects demand deflation in the global economy.

In the United States, following several years of rebounding exports, both export and import demand weakened markedly in 2012. The corresponding narrowing of the saving investment gap reflects a small decline in the savings rate and significant moderation in investment demand. The household saving rate, which increased from about 2.0 percent of disposable household income before the financial crisis to about 5.0 percent in the past few years, has started to fall again to about 3.8 percent. The investment rate fell from 19.2 percent in 2007 to 16.4 percent of GDP in 2012. The government budget defi cit dropped from 10.1 percent of GDP in 2011 to 8.7 percent in 2012, mainly as a result of further cuts in government spending, not increased government revenue. In the outlook, a further narrowing of the current-account defi cit is expected in the United States in 2013 as a result of weakness caused by similar adjustments.

The decline in the external surplus of China was driven by a drop in export growth

In the surplus countries, the decline in the external surplus of China has mainly been driven by a significant drop in the growth of its exports caused by the weaker global economy, rather than a strengthening of imports pushed by domestic rebalancing.

Both exports and imports in Chinadecelerated substantially in 2012, even as China’s exchange-rate policy has become more flexible. The Government has stepped up measures aiming to boost household consumption and rebalance the structure of the economy towards greater reliance on domestic demand, but thus far this has not resulted in any visible increase in the share consumption in GDP. The corresponding narrowing of the saving-investment ratio in Chinacame mainly from a notable slowdown in the growth of investment, rather than a reduction in saving brought on by increased consumption.

In Japan, the narrowing of its external surplus has, to some extent, reflected the strengthening of its domestic demand — including increased imports of oil related to reconstruction in the aftermath of the devastating earthquake — but also a significant slowdown in exports.

The surpluses in oil-exporting countries are of quite a different nature as these countries will need to share the wealth generated by the endowment of oil with future generations through a continued accumulation of surpluses in the foreseeable future. Yet, some studies warn of a slowdown in oil exports for the Russian Federation in the medium run.[8]

In the euro area, the current-account deficits of member States in the periphery fell dramatically as a result of fiscal austerity and the severe contraction of private investment and consumption demand. Smaller current-account deficitswere accompanied by large financial outflowstriggered by panic in the banking sector of debt-distressed countries of the euro area. This reflects a stark reversal of the European economic integration process of past decades, when capital flowed from the core members to the peripheral members. In Germany, room remains for policies to stimulate more domestic demand so as to further narrow its external surplus.

Global imbalances persist, inducing wide imbalances in net asset and liability positions. The latest data show that the net external liability position of the United States widened to a record $4 trillion (more than 25 percent of GDP) in 2011, a significant increase from $2.5 trillion in the previous year (figure I.14). The foreign assets owned by the United States totalled about $21 trillion by the end of 2011, while assets in the United States owned by the rest of the world totalled about $25 trillion.[9] Given the trends in global financial markets in 2012 and the current-account deficit trends discussed above, the net external liability position of the United States is estimated to have increased further during 2012.

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[9]The United States acquisitions of foreign assets increased by about $484 billion during the year, but valuation adjustments lowered the value of foreign assets owned by the United States by $702 billion, mostly from decreases in prices of foreign stocks. On the other hand, foreign acquisitions of the assets in the United States increased by about $1 trillion, and valuation adjustments raised the value of foreign-owned assets in the United States by $353 billion, mostly from price increases of the United States Treasury bonds. In short, the large increase in the net external liability position of the United States during 2011 mainly refl ected a substantial change in the valuation of the assets and liability, with net fl ows accounting for a smaller part.

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Given current trends, the global imbalances are not expected to widen by a margin significant enough in the coming two years as to become an imminent threat to the stability of the global economy. However, the large net liability position of the United States poses a continued risk to the medium-term stability of exchange rates among major currencies, as investors and monetary authorities holding large dollar-reserve holdings may fear a strong depreciation of the dollar over time and which would accelerate such a process in possible disorderly fashion. Should the global economy fall into another recession, the imbalances could narrow further through demand deflation. It would thus seem that international policy coordination should not have the rebalancing of current-account positions as its primary focus in the short term, but rather should give priority to concerted efforts to reinvigorate the global recovery, job creation and greater policy coherence to break out of the vicious circles.

Figure I.14
Net international investment position in the United States
Billions of dollars
Source: UN/DESA, based on United States Bureau of Economic Analysis data.
Note: Data for 2009 and 2010 has been revised; data for 2011 is preliminary.
World Economic Situation and Prospects 2013
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Uncertainties and risks

The baseline outlook presented above is subject to major uncertainties and risks, mostly on the downside. The economic crisis in the euro area could continue to worsen and become more disruptive. The United States could fail to avert a fiscal cliff. The slowdown in a number of large developing countries, including China, could well deteriorate further, potentially ending in a “hard landing”. Geopolitical tensions in West Asia and elsewhere in the world might spiral out of control. Given dangerously low stock-use ratios of basic grains, world food prices may easily spike with any significant weather shock and take a toll on the more vulnerable and poorest countries in the world. The discussion in this section focuses on the likelihood of the occurrence of the first three of these risks and what impact there would be on the global economy should they materialize.

Risk of a deeper crisis in the euro area

The euro area crisis continues to be the biggest threat to global growth

The crisis in the euro area continues to loom as the largest threat to global growth. The economies in the euro area have been suffering from entanglement in a number of vicious circles. The dangerous dynamics between sovereign debt distress and banking sector fragilityare deteriorating the balance sheets of bothGovernments and commercial banks. The fiscal austerity responsesare exacerbating the economic downturn, inspiring self-defeating efforts at fiscal consolidation and pushing up debt ratios, thereby triggering further budget cuts.

As a result, the region has already fallen into another recession three years after the global Great Recession of 2009, with unemployment rates rising to record highssince the debut of the euro. The situation in Greeceremains particularly dire, despite the fact that fears of an imminent exit from the monetary union have eased and Greek government bond yields have subsequently retreated from their peaks following the debt restructuring in early 2012. GDP continues to plunge, however, even after having already fallen by nearly 20 percent since 2007. Unless the troika of the EU, the ECB and the IMFrelax the terms of conditionality on the target and the time span of Greek fiscal adjustment, and also provide more support, the economy will be unable to extricate itself from the present crisis any time soon.

The focus of attention shifted towards Spain in mid-2012. Spain is the fourth largest economy of the euro area, with a GDP twice the size of Greece, Ireland and Portugal combined. The country’s borrowing costs surged when the Government asked for international financing to recapitalize the banks in early June 2012. Yields on 10-year sovereign bonds peaked at 7.6 percent in late July, surpassing the level Greece, Ireland and Portugal faced when they were forced to ask for international assistance to address debt distress. Financial market contagion spread to Italy, which also has seen significant increases in sovereign borrowing costs.

These developments posed heightened systemic risks for the monetary union.

In response, the ECB announced a new OMT programme in September through which it can make potentially unlimited purchases of sovereign bonds with a maturity of three years or shorter issued by selected debt-distressed countries. The OMT programme aims to reduce borrowing costs for these countries. However, the ECB can only purchase bonds under the OMT programmeif countries have applied for international assistancevia boththe European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which comes with policy conditionality attached.

After the announcement, sovereign yields of Spain and a few other countries retreated substantially (figure I.15). In late September, Spanish authorities presented a budget that aims to cut the projected 2013 deficit by €40 billion ($51.4 billion). Government spending is to be cut by 8.9 percent, while public infrastructure spending is to drop from 1.3 percent to 0.89 percent of GDP, among other austerity measures. A recent bank stress test showed a capital shortfall of €59.3 billion for Spanish banks. It will be feasible to repair this with the €100 billion in European aid the Spanish Government has already requested for recapitalization of its banks.

The OMT programme of the ECB could significantly reduce debt refi nancing costs, but uncertainties remain

The OMT programme initiated by the ECB, if implemented as planned, potentially could significantly reduce debt refinancing costsfor Spain and debt-distressed euro area countries. Uncertainties remain, however, on a number of issues unfolding in the future. For example, the agreement made earlier by euro area leaders to directly recapitalize Spanish banks without increasing the country’s sovereign debt was considered to be a key initiative to effectively short-circuit the vicious feedback between sovereign debt and bank fragility. Subsequently, however, some euro area member countries have voiced a somewhat different interpretation in that the direct bank recapitalization would work only for banks getting into trouble in the future, not for those being rescued under the current programme for Spain. If this interpretation would hold in practice, Spain’s government deficit would be much higher than originally projected and could trigger severe additional fiscal adjustment.

In contrast with Greece, some analysts argue that Spain’s woes started in the private sector as the housing bubble burst, drastically reducing government tax revenue and prompting a rescue of banks. Before that, the Government had relatively low debt levels and a modest deficit. From this perspective, fiscal austerity would not address the root cause of the problem in Spain, but only exacerbate the economic downturn and cause more unemployment.

The announced policy initiatives seem to be insufficient to break the downward spiral

In any case, even if the policy initiatives announced to date are implemented as planned, they seem to be insufficient to break the downward spiral many euro area members face in the short run and inadequate to boost a solid growth in the medium run.

Given all the uncertainties and risks, a number of researchers have already studied the scenarios and economic ramifications of the possible exit of some euro area members.[10] The pessimistic scenario, discussed further below, does not assume any break-up of the euro area or the exit of any of its members, however. The real implications of such an event are extremely difficult to gauge because of the large amount of financial market uncertainty that would arise and the complex, but as yet unknown, set of institutional rearrangements that would result.

[10] Global Insight estimates that an exit of Greece would come with substantial international spillover effects. It estimates that the simulated output loss for the United States could be as much as 2.5 percent, pushing the economy into recession in 2013. (See IHS Global Insight, “US Executive Summary”, November 2012). Oxford Economics (“Central banks take out additional insurance”, Global Scenario Service, September 2012) estimates that an exit of Greece in the third quarter of 2013 would lower euro area GDP by 3.5 percent and WGP would drop 1.3 percent below the baseline for 2014.

In a fuller euro area break-up with Greece, Portugal, Ireland, Spain, Italy, and Cyprus exiting in the first quarter of 2014, Oxford Economics estimates output losses could be as high as 10 percent and those for the world as a whole would also be commensurately higher.

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Instead, the downside scenario presented below looks at possibility of a much deeper recession in the euro area than delineated in the baseline. The further downturn could be caused by a delayed implementation of the OMT programme and other support measures for those members in need. Delays could occur through political difficulties in reaching agreement between the countries in need of assistance and the troika of EU, ECB and IMF, and/or much larger detrimental effects of the fiscal austerity programmes and more difficulties in structural adjustments than anticipated in the baseline forecast.[11]

[11] More specifically, the scenario of a deeper euro crisis presented in table I.2 below assumes further fiscal tightening in the debt-distressed countries and no use of the OMT programme. As a result, bond yields and borrowing costs increase, while consumer and business confidence drop further, affecting private consumption and investment demand.

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Uncertainties about the “fiscal cliff ” in the United States

The United States may see major changes in government spending and tax policy at the end of 2012

Unless Congress can reach an agreement to avert it, the United States will face a sharp change in its government spending and tax policy at the end of 2012. Because of the potentially severe implications, it has been coined the “fiscal cliff ”. The tax cuts endorsed during the Administration of George W. Bush worth $280 billion per year (often referred to as the “Bush tax cuts”), the 2 percentage point payroll tax reduction worth $125 billion, and the emergency unemployment compensation worth $40 billion introduced during the first term of the Obama Administration, were all designed to expire at the end of 2012. More specifi cally, the expiration of the Bush tax cuts would imply an increase in income tax rates across all income levels by about 5 percentage points in 2013. Among the other changes associated with the expiration of Bush tax cuts are the phasing out of the reduction in the Federal Child Tax Credit and an increase in the maximum tax rate for long-term capital gains by about 5 percentage points. The expiration of the 2-percentage point reduction in employee payroll taxes would imply a decline in aggregate disposable income by about $125 billion. Moreover, the expiration of emergency unemployment compensation, which was first passed into law in 2008 and has been extended in the past four years, would imply a reduction in consumption spending by about $40 billion.[12] On the expenditure side, automatic budget cuts will be activated, cutting expenditure by $98 billion.[13] Together these actions amount to a downward adjustment in aggregate demand of no less than 4 percent of GDP.

[12] For more details, see JPMorgan Chase Bank NA, “The US fiscal cliff : an update and a downgrade”, Economic Research Note, 18 October 2012, available from https://mm.jpmorgan.com/EmailPubServlet?h=c7s2j110&doc=GPS-965096-0.pdf; and Joseph Brusuelas, “Fiscal cliff ”, Bloomberg Brief, 25 September 2012, available from http://www.bloombergbriefs.com/files/2012-9-25-Fiscal-Cliff-Special-Issue.pdf.

[13] These automatic cuts are specifi ed in the Budget Control Act which was adopted as a result of the failure of the Joint Select Committee on Defi cit Reduction (the so-called “Supercommittee”) to reach an agreement in 2011 as to how to bring the budget defi cit down to sustainable levels over the next ten years.

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The risk was still clear and present in the immediate aftermath of the November 6 presidential and congressional elections in the United States. In the worst case, political gridlock would prevent Congress from reaching any agreement, leading to a full-scale drop in government spending by about $98 billion and substantial hikes in taxes amounting to $450 billion in 2013. It is reasonable to assume that after realizing the costs to the economy, policymakers will feel compelled to reach an agreement on reinstating those tax reduction measures and on ceasing the automatic spending cuts in the second half of 2013.

A hard landing of some large developing economies

Growth slowed noticeably during 2012 in a number of large developing economies, such as Brazil, China and India, which all enjoyed a long period of rapid growth prior to the global financial crisis and managed to recover quickly at a robust pace in 2010. For example, growth in Brazil dropped from a peak of 7.5 percent in 2010 to an estimated 1.3 percent in 2012;in China, from 10.4 percent to 7.7 percent; and in India, from 8.9 percent to 5.5 percent.

Given the uncertainties about their external demand and various domestic growth challenges, risks of further and larger-than-expected declines in the growth of these economies are not trivial. In this section, China is used as an exampleto illustrate such risks and their implications for these economies and for the rest of the world.

China has seen a slowdown in exports and investment

China’s exports continued to slow during 2012, owing to weak demand in major developed economies. For 2012 as whole, real exports for China may register growth of about 5-6 percent, compared to an average growth of about 20 percent in the past 10 years. Meanwhile, growth in investment, which contributed to more than 50 percent of GDP growth in the past decades, has been decelerating. Growth in nominal fixed investmenthas declined from 25 percent a year ago to 20 percent currently. As fixed investment accounts for almost 50 percent of GDP, this decelerationalone will reduce GDP growth by 2.5 percentage points. Compared with 2009, when China’s exports dropped by more than 10 percent, it appears that the present deceleration in GDP growth comes mainly on account of domestic demand.

The slowdown in investment growth in China has been driven primarily by two factors. First, the Government has adopted policies to control the risk of asset price bubbles in the housing sector, including requirements for larger down payments and limits on the number of housing units people can buy. Real estate investment, which accounts for about 25 percent of total fixed investment, increased by 15 percent in the first half of 2012, but the pace of growth was down from 33 percent recorded a year ago. Acquisition of land for home construction has been declining at an annualized pace of about 20 percent since the beginning of 2012. Because this is a key source of revenue for local governments in China, their fiscal space has been heavily reduced. Slower real estate investment growth also has considerable damaging effects on supplying industries.

Second, the central Government has become more cautious about fiscal stimulus.

Most of the 2009-2010 large-scale fiscal stimulus package, costing about 4 trillion yuan, was used for infrastructure investment and formed an important driver of economic growth in those years. However, after it was phased out in 2011, increasing concerns have been expressed in China over unintended side effects created by the stimulus and vast excess production capacity emerging in some industrial sectors. The Government seems set to put more effort into restructuring the economy, rather than trying to create more aggregate demand stimulus. This is based on the assumption that a rebalancing of the economy through an increase in the share of household consumption in GDP could compensate for a decline in the investment rate and a slowdown in exports. It assumes that with such rebalancing the economy could still grow at a robust pace of 7.5 percent (which is the official growth target for 2012). However, thus far it has proven difficult to boost consumption in the short run and, moreover, industrial restructuring and future GDP growth would require making substantial new investments today.

Furthermore, local governments have been facing financing constraints in the implementation of new projects. Fixed investment projects managed by local governments account for more than 90 percent of total fixed investment in value terms. The financing constraints have emerged because of less revenue from land sales and lack of bank lending as the banks await positive signals from the central Government.

In the downside scenario, it is assumed that growth in China would slow to about 5 percent

Because of these factors, there are substantial risks for much lower GDP growth in China. The downside scenario presented below assumes a slowdown in growth to about 5 percent per year, particularly if fixed investment growth decelerates further, subtracting another 5-10 percentage points per year in 2013-2014. Other assumptions for this alternative scenario for the Chinese economy include the central Government maintaining the tightening measures in the housing sector and no fiscal stimulus.

Risk of a double-dip global recession

Table I.2 summarizes the global economic consequences of the three scenarios discussed above, based on simulations using the United Nations World Economic Forecasting Model.

A deepening of the euro crisis would cause a loss of global output of more than 9 percent

The euro crisis scenario focuses on the relatively high risk of deeper fiscal cuts in the debt-distressed countries. For reasons mentioned above, the much worse case, but, for now, less likely scenario of a break-up of the monetary union is not considered here.

More specifically, in this first scenario, Greece, Italy, Portugal and Spain are expected to take further austerity measures in 2013, with deeper cuts than assumed in the baseline. As a result, the estimated output losses in these economieswould be between 1 and 2 percentage points in 2013. The deeper recession is assumed to spread to other economiesthrough trade channels and, more importantly, through greater financial uncertaintyas confidence in the euro and prospects for recovery erodes further. As a result, the economy of the euro area would shrink by 0.9 percent compared with the baseline forecast for 2013, thus further deepening the euro area recession that set in throughout 2012. During 2013-2015, the cumulative output loss for the euro area as a whole would amount to 3.3 percent. The further weakening in the euro area would spill over to the rest of the world and the cumulative loss of global output would amount to 1.1 percentage points. The other developed economies, such as the United States and Japan, would all suffer notable losses. The deepening of the euro crisis would cost developing countries about 0.5 percent of GDP on average.

The fiscal cliff would have an even larger impact

In the fiscal cliff scenario, world economic growth would slow to 1.2 percent in 2013, compared to 2.4 percent in the baseline. The cumulative output loss between 2013 and 2015 would be 2.5 percentage points. The United States economywould enter into recession and Japan and the EU would also be severely affected, with output losses of about 2 percentage points during 2013-2015. Mexico and Central Americawould be hardest hit among developing countries, losing about 3.0 percentage points owing to close economic ties with the United States. East Asian economieswould see cumulative output losses of about 1.6 percentage points.

A hard landing of the Chinese economy would also have a visible impact on the world economy

A hard landing of the Chinese economy, with GDP growth slowing to 5 percent in 2013, would also have a visible impact on the world economy. China accounts for about 8 percent of WGP and 10 percent of world trade. Compared with the baseline forecast, a 3 percentage point deceleration in the pace of growth of the Chinese economy would cause a cumulative global output loss of 1.5 percentage points during 2013-2015.Given its close economic ties with China, Japan would be most affected, suffering a GDP loss of 1.6 percentage points. GDP of the United States and the EUwould drop by 0.7 and 0.6 percentage points, respectively, over 2013-2015 compared with the baseline.

Much of their output losses would be caused by lower exports of capital goods to China.

Table I.2

Downside scenarios for the world economy

Percentage deviation from baseline GDP level

Table I.2

Output loss (-)

Deeper euro area crisis

United States fiscal cliff

Hardlanding in China

Three scenarios combined

2013

2014

2015

2013

2014

2015

2013

2014

2015

2013

2014

2015

World

-0.3

-0.7

-1.1

-1.2

-2.1

-2.5

-0.4

-1.0

-1.5

-2.2

-4.3

-5.9

Developed economies

-0.4

-0.9

-1.5

-1.7

-2.7

-3.2

-0.1

-0.4

-0.8

-2.5

-4.7

-6.4

United States of America

-0.1

-0.4

-0.8

-3.8

-5.2

-5.3

-0.1

-0.3

-0.7

-4.1

-6.3

-7.3

Japan

-0.2

-0.4

-0.6

-0.6

-1.2

-2.1

-0.4

-0.9

-1.6

-1.7

-3.5

-5.8

European Union

-0.7

-1.8

-2.7

-0.5

-1.2

-1.9

-0.1

-0.3

-0.6

-1.6

-4.1

-6.5

EU-15

-0.7

-1.8

-2.8

-0.5

-1.2

-2.0

-0.1

-0.3

-0.6

-1.6

-4.2

-6.7

New EU members

-0.6

-1.1

-1.3

-0.2

-0.6

-1.1

-0.1

-0.3

-0.6

-1.4

-2.8

-3.7

Euro area

-0.9

-2.1

-3.3

-0.5

-1.2

-1.8

-0.1

-0.3

-0.6

-1.7

-4.6

-7.3

Other European countries

-0.4

-0.9

-1.2

-0.2

-0.8

-1.4

-0.1

-0.3

-0.7

-1.1

-2.8

-4.2

Other developed economies

-0.1

-0.2

-0.3

-0.6

-1.3

-1.7

-0.1

-0.3

-0.7

-0.8

-2.0

-3.0

Economies in transition

-0.3

-0.5

-0.6

-0.2

-0.5

-0.7

-0.1

-0.3

-0.6

-0.9

-1.8

-2.4

South-Eastern Europe

-0.5

-0.8

-0.9

-0.1

-0.4

-0.7

0.0

-0.2

-0.3

-1.1

-1.9

-2.4

Commonwealth of Independent States and Georgia

-0.3

-0.5

-0.6

-0.2

-0.5

-0.8

-0.1

-0.4

-0.7

-0.9

-1.8

-2.4

Russian Federation

-0.3

-0.5

-0.6

-0.2

-0.5

-0.8

-0.1

-0.4

-0.7

-0.8

-1.8

-2.4

Developing economies

-0.2

-0.3

-0.5

-0.3

-0.9

-1.3

-1.1

-2.3

-3.0

-1.7

-3.7

-5.1

Africa

-0.5

-0.5

-0.6

-0.6

-1.0

-1.0

-0.4

-0.8

-1.1

-1.8

-2.5

-2.9

North Africa

-0.9

-0.8

-0.9

-0.9

-1.2

-1.1

-0.2

-0.4

-0.7

-2.7

-2.9

-3.1

Sub-Saharan Africa

-0.3

-0.3

-0.4

-0.5

-0.9

-0.9

-0.5

-0.9

-1.3

-1.5

-2.3

-2.8

Nigeria

-0.4

-0.5

-0.7

-1.1

-1.8

-1.7

-0.1

-0.4

-0.7

-1.8

-3.0

-3.5

South Africa

-0.3

-0.2

-0.3

-0.3

-0.5

-0.5

-1.1

-1.8

-2.3

-1.9

-2.6

-3.2

Others

-0.3

-0.3

-0.4

-0.4

-0.7

-0.8

-0.2

-0.6

-0.9

-1.1

-1.8

-2.3

East and South Asia

-0.1

-0.3

-0.5

-0.3

-0.9

-1.4

-1.6

-3.3

-4.2

-2.2

-4.8

-6.4

East Asia

-0.2

-0.4

-0.6

-0.3

-1.0

-1.6

-2.0

-3.9

-4.9

-2.6

-5.6

-7.4

China

-0.2

-0.4

-0.7

-0.4

-1.1

-1.8

-3.0

-5.7

-6.8

-3.7

-7.6

-9.6

South Asia

-0.1

-0.2

-0.3

-0.1

-0.4

-0.5

-0.3

-0.8

-1.5

-0.6

-1.5

-2.5

India

-0.1

-0.2

-0.2

-0.1

-0.4

-0.5

-0.1

-0.3

-0.5

-0.4

-0.9

-1.4

Western Asia

-0.1

-0.2

-0.3

-0.2

-0.5

-0.7

-0.1

-0.3

-0.6

-0.6

-1.2

-1.9

Latin America and the Caribbean

-0.2

-0.3

-0.4

-0.5

-1.2

-1.7

-0.4

-0.9

-1.5

-1.0

-2.5

-3.7

South America

-0.1

-0.2

-0.3

-0.2

-0.6

-0.9

-0.4

-1.0

-1.6

-0.8

-2.0

-3.1

Brazil

-0.1

-0.2

-0.3

-0.1

-0.4

-0.7

-0.4

-1.1

-1.7

-0.8

-1.9

-2.9

Mexico and Central America

-0.3

-0.4

-0.6

-1.0

-2.6

-3.2

-0.5

-0.9

-1.4

-1.4

-3.7

-5.2

Mexico

-0.3

-0.4

-0.6

-1.0

-2.7

-3.4

-0.5

-1.0

-1.5

-1.4

-3.9

-5.5

Caribbean

-0.1

-0.2

-0.4

-0.5

-1.2

-1.6

0.0

-0.1

-0.3

-0.7

-1.7

-2.5

Least developed countries

-0.2

-0.3

-0.4

-0.3

-0.6

-0.8

-0.2

-0.5

-0.7

-0.8

-1.6

-2.1

a

See section on "Uncertainties and risks" for assumptions for these scenarios.

Source:

UN/DESA. World Economic Situation and Prospects 2013

Developing Asiawould also feel the consequences through trade channels, especially as it experiences decreased demand for intermediate products in the context of global value chains (see chapter II for further discussion). Economies in Latin America, Africa and Western Asiawould be most impacted by lower demand for primary commodities, losing about 1 percent of their aggregate income.

It is difficult to ascertain the probability of these three risks materializing simultaneously.

However, considering the magnitude of the global consequences of each of these eventsseparately, if these events were to occur at the same time, thereby reinforcing each other, the global economy would fall into another Great Recession.

Policy challenges

Current macroeconomic policy stances

Most developed countries have adopted a combination of fiscal austerity and expansionary monetary policies

Weakening economic growth and policy uncertaintiescast a shadow over the global economic outlook. As indicated, most developed countries have adopted a combination of fiscal austerity and expansionary monetary policies, aiming to reduce public debt and lower debt refinancing costs in order to break away from the vicious dynamics between sovereign debt and banking sector fragility. These policy measures were expected to calm financial markets and restore consumer and investor confidence. Supported by structural reforms of entitlement programmes, labour markets and business regulation, the improved environment is expected to help restore economic growth and reduce unemployment. However, reducing debt stocks is proving to be much more challenging than policymakers expected.

Public debt rollover requirements remain very high and continue to expose fiscal balances to the whims of financial markets. Helped by the QE policies of central banks, borrowing costs have been contained and are elevated only for a subset of debt-distressed euro area countries. While the QE programmes have helped lower long-term interest rates, their impact on economic growth will be rather limited at this stage of the recovery.

An additional problem is that fiscal consolidation efforts of most developed countriesrely more on spending retrenchment than improving revenue collection. The former tends to be more detrimental to economic growth in the short run, particularly when the economy is in a downward cycle.[14] In many developed countries, public investment is being cut more severely than any other item, which may also prove costly to medium-term growth. In most cases, spending cuts also involve entitlement reforms, which immediatelyweaken automatic stabilizers in the short run by curtailing pension benefits, shortening the length of unemployment benefit schemes and/or shifting more of the burden of healthcare costs to households. Moreover, the fiscal austerity measureshave been found to induce greater inequality in the short run.[15] The impact tends to be strongerwhen unemployment effects are higher, when there is no compensation for the cost of entitlement reform to lower- and middle-income groups, and when revenue increases are pursued through increases in sales or value-added tax rates. Rising inequalityby itself tends toweaken the recovery, as lower-income groups tend to have higher spending pro-pensities. thus The distributional impact of spending and revenue measuresshould be a concern to macroeconomic policymakers. In short, downside risks for developed countriesremain extremely high, because the present policy stances are, on balance, not supportive of growth and job creation, and thus fail to definitively break out of the vicious circle.

Most developing countries and economies in transition have relatively stronger fiscal positions. Some have opted to put fiscal consolidation on hold in the face of global economic weakening. Fiscal deficits may rise in most low-income countries that have slowing government revenue from commodity exports and the growing weight of food and energy subsidies. Concerns are also mounting in developing countries about the possible adverse effects of QE on the financial and macroeconomic stability of their economies through increased volatility in international prices of commodities, capital fl ows and exchange rates. Such concerns underlie the further accumulation of reserves and justify maintaining capital controls. Facing a slowdown in growth and Inflation, central banks in many developing countries and economies in transition have eased monetary policy during 2012. In the outlook, further monetary easing will be likely in many of these countries, except for those with persistently high Inflation, such as South Asia and Africa.

The need for more forceful and concerted action

Given the looming uncertainties and downside risks discussed in the previous section, current policy stances seem to fall well short of what is needed to prevent the global economy from slipping into another recession. More forceful and concerted actions should be considered.

Policy uncertainties should be addressed immediately and a different approach must be taken

First, the policy uncertainties associated with the three key risks discussed in the downward scenario need to be addressed immediately through shifts in approach and greater consideration of international spillover effects of national policies. In the euro area, the piecemeal approach to dealing with the debt crises of individual countries of the past two years should be replaced by a more comprehensive and integrated approach, so as to address the systemic crisis of the monetary union and mitigate the key risks for the stability of the global economy. While individual countries may still need to confront issues in their domestic economic structures and institutions, crucial collective efforts are needed to close the institutional gaps and mend the pervasive deficiencies of the EMU, including through laying solid foundations for fiscal and banking unions. Although important steps in this direction are being taken or considered, the present state of affairs requires much swifter and more forceful action. Only when concrete actions are taken that will restore confidence in the union can other more technical policy measures be put in place to deal with such issues as how to resolve debt overhang and how to break the linkage between sovereign risk and bank fragility. Policymakers in the United States should prevent a sudden and severe contraction in fiscal policy—the so-called fiscal cliff —and overcome the political gridlock that was still present at the end of 2012. As holds for the EU, the global ramifications of failing to do so should be considered. It is only feasible to work out the current debt problems over the long run, and a fiscal consolidation plan will be credible only when rooted in an explicit strategy of economic growth and jobs creation. The major developing countries facing the risk of hard landings of their economies should engage in stronger countercyclical policy stances aligned with measures to address structural problems over the medium term. China, for instance, possesses ample policy space for a much stronger push to rebalance its economy towards domestic demand, including throughincreased government spending on public services such as health care, education and social security—all of which will help lower precautionary household savings and increase consumption, thus reducing dependence on external demand.

Fiscal policy should become more countercyclical, more supportive of jobs creation and more equitable

Second, more specifically, fiscal policy should become more countercyclical, more supportive of jobs creation and more equitable. The present focus on fiscal consolidation in the short run, especially among developed countries, has proven to be counterproductive and to cause more protracted debt adjustment. The focus needs to shift in a number of different directions:

As a starting point, a first priority of fiscal adjustmentshould be to provide more direct support to output and employment growth by boosting aggregate demand and, at the same time, spread out plans for achieving fiscal sustainability over the medium-to-long term. Introducing cyclically adjusted or structural budget targets will allow for keeping a countercyclical stance while aiming for fiscal sustainability over the medium term.

Fiscal multipliers tend to be more forceful during a downturn, but can be strengthened further by shifting budget priorities to growth-enhancing spending, undoing cuts in public investment and expanding subsidies on hiring (which may be targeted towards new labour entrants and the long unemployed) as well as enhancing public work programmes and employment schemes. On the tax side, reducing taxes on labour and changing tax codes to reduce labour income tax wedges for youth, women, and older workers are options that provide short-term boosts to employment as well as labour supply.

The distributional consequences of fiscal policies should be duly considered, not only for equity reasons, but also because of their implications for growth and employment generation. As indicated, rising inequality tends to have a dampening effect on aggregate demand and hence on economic growth. Shifting spending prioritiesto enhance employment effects will help avoid such an outcome, as much as would maintaining an adequate degree of progressivity in taxation and access to social benefits. Many middle- and lowincome countries may wish to reconsider across-the-board subsidies on food and fuel; these tend to come with a heavy fiscal cost, while the benefits may accrue most to higher-income groups. Better targeting would provide more effective income protection to the poor at potentially much lower fiscal cost.

Economic recovery can be strengthened in the short and longer run by promoting green growth through fiscal incentives and investments in infrastructure and new technologies. Lessons can be learned from several developing countries, such as the Republic of Korea, which have successfully provided economic stimulus through green infrastructure investment and energy-saving incentives. This has been found to generate strong employment effects, suggesting that investing in green growth can be a win-win solution. Moreover, these measures are imperative to substantially accelerating reductions in greenhouse gas emissions—an essential step in combating climate change. Developing countries also stand to gain, provided they obtain technological and financial support to adopt the still higher-cost clean energy technologies without jeopardizing economic development prospects.

Global financial market instability needs to be attacked at its root causes

Third, global financial market instability needs to be attacked at its roots. This challenge is twofold. First, greater synergy must be found between monetary and fiscal stimulus. Continuation of expansionary monetary policies among developed countries will be needed, but negative spillover effects into capital-flow and exchange-rate volatility must be contained. This will require reaching agreement at the international level on the magnitude, speed and timing of QE policies within a broader framework of targets to redress the global imbalances. The second part of the challenge is to accelerate regulatory reforms of the financial sector. This will be essentialin order toavoid the systemic risks and excessive risk-takingthat have led to the low-growth trap and financial fragilityin developed countries and high capital flow volatility for developing countries. Steps have been proposed in some national jurisdictions, but implementation is lagging behind.

Moreover, insufficient coordination between national bodies appears to result in a regulatory patchwork. Global financial stability is unlikely to be achieved in the absence of a comprehensive, binding and internationally coordinated framework. This is needed to limit regulatory arbitrage, which includes shifting high-risk activities from more to less strictly regulated environments. Among other measures, such a framework should includestrict limits on positions that financial investors can take in commodity futures and derivatives markets — measures that may also help stem volatility in capital flows and commodity prices.

Sufficient resources need to be made available to developing countries

Fourth, sufficient resources must be available to developing countries, especially and those possessing limited fiscal spacefacing large development needs. These resources will be needed to accelerate progress towards the achievement of the MDGs and for investments in sustainable and resilient growth, especially for the LDCs. has Fiscal austerity among donor countriesalso affected aid budgets, as seen in the decline of ODA in real terms in 2011. Further declines may be expected in the outlook. Apart from delivering on existing aid commitments, donor countries should consider mechanisms to delink aid flows from their business cycles so as to prevent delivery shortfalls in times of crisis when the need for development aid is most urgent. In this regard, internationally agreed taxes (such as airline levies, currency transaction taxes or carbon taxes), along with the possibility of leveraging idle special drawing rights (SDRs) for development finance could be considered, as suggested in a recent United Nations report.[16]
[16] World Economic and Social Survey 2012: In Search of New Development Finance (United Nations publication, Sales No. E.12.II.C.1).
--------------

A jobs creation and green growth-oriented agenda as outlined above is compatible with medium-term reduction of public debt ratios and benign global rebalancing, as shown in a scenario of internationally concerted policies simulated using the United Nations Global Policy Model (GPM).[17] With continued existing policies, but assuming no major deepening of the euro crisis, growth of WGP would average, at best, about 3 percent per year on average, far from sufficient to deal with the jobs crisis or bring down public debt ratios. The alternative scenario, based on the agenda outlined above, includes a shift in fiscal policies away from austerity and towards more job creation through, inter alia, more spending on infrastructure; energy efficiency, social programmes and tax and subsidy measures to stimulate private investment projects in these areas; continued expansionary monetary policies aligned with stronger capital account regulation to stem capital flow volatility; and enhanced development assistance to the poorest nations. The GPM simulationsshow that under such a policy scenario, WGP would grow at an average rate of 4.5 percent between 2013 and 2017, public debt-to-GDP ratios would stabilize and start falling from 2016 or earlier. Employment levels in major developed countries would gradually increase and return to pre-crises levels in absolute terms by 2014 and by 2017 after accounting for labour force growth. The employment recovery thus would come much sooner than in the baseline, although remaining protracted even with the suggested internationally concerted strategy for growth and jobs. An additional 33 million jobs per year on average would be created in developing and transition economies between 2013 and 2017 (see box I.3).

[17] The scenario is an update of the ones presented in World Economic Situation and Prospects 2012, op. cit., pp. 33-36; and United Nations Economic and Social Council, “World economic situation and prospects as of mid-2012 (E/2012/72).

Box I.3

An internationally coordinated strategy for jobs and growth

An alternative policy scenario based on the recommendations in this chapter has been created using the United Nations Global Policy Model (GPM). The key finding is that such a scenario would avoid a widespread double-dip recession; instead, it would allow for a benign rebalancing of the global economy. Job losses caused by the global financial crisis would see recovery and a shift towards more sustainable fiscal balances and debt levels would begin, setting the global economy on a more sustained (and sustainable) path to growth.

The key differences with the baseline policy assumptions are that:

Policies, especially those in developed economies, shift away from premature fiscal austerity and towards a more countercyclical stance, thereby supporting aggregate demand in the short run. This is done cautiously, however. Public spending is allowed to grow, but more slowly than GDP. As tax revenues grow in response to overall income growth, budget deficits narrow and debt-to-GDP ratios decline over time.

In all countries, Governments enhance public spending on social and physical infrastructure and public investment as well as expanding fiscal incentives for private investors promoting “green” growth (including through greater energy efficiency and clean energy generation). This also applies to developing countries where most additional public spending is directed to infrastructure investment, including capacity in sustainable agriculture and renewable energy. Green growth investments are generally perceived to have greater job creation effects than existing “brown” technologies. This is also assumed to be the case in the GPM.

Industrial policy incentives implemented by developing countries are assumed to be supportive of economic diversification and reduced dependence on commodity exports.

Central banks and other financial regulators in developed countries further step up action to prevent soaring interest rates on sovereign bonds and accelerate regulatory action that reduces bank fragility and helps commercial lending to grow again.

The policy scenario further assumes that these national policies are part of an internationally concerted strategy. Policy coordination would ensure that there is sufficient aggregate fiscal stimulus in the short run, while differentiating stimulus across countries in accordance with available fiscal and other macroeconomic policy space (based on initial levels of indebtedness, sovereign borrowing costs and size of external surplus).

Furthermore, it is assumed that monetary policy action is better coordinated internationally to prevent the strategy underlying the alternative scenario from being disrupted by excessive exchange-rate and capital fl ow volatility. Through concerted efforts, developing countries (low-income countries, in particular), are provided with adequate access to offi cial development assistance and other external fi nancing to complement domestic resources for fi nancing new investments in infrastructure and sustainable energy and agriculture.

Figure A: Employment levels of selected countries or country groups
(a) Europe, Japan and other developed economies
(b) United States
(c) Transition and developing economies
Baseline
Coordinated strategy for jobs and growth
Figure B: GDP growth rates of selected countries or country groups
Percentage
(a) Europe, Japan and other developed economies
(b) United States
(c) Transition and developing economies
Baseline
Coordinated strategy for jobs and growth

Under these assumptions, growth of world gross product would accelerate to about 4.5 percent per year, with both developed and developing economies accelerating output growth by between 1 and 2 percentage points compared with the baseline (see figures A and B). Shortly after the new policies are in place, the jobs defi cit caused by the global financial crisis of 2008-2009 would start to close, especially in the developed countries. Employment levels in major developed countries would gradually increase and return to pre-crisis levels in absolute terms by 2014, and by 2017 after accounting for labour force growth. The employment recovery would thus come much sooner than in the baseline, although it would remain protracted, even with the suggested internationally concerted strategy for growth and jobs. An additional 33 million jobs per year on average would be created in developing and transition economies between 2013 and 2017.

The simulation also shows that more rapid recovery of growth and employment helps to stabilize public debts. After an initial increase, government defi cits would quickly decrease, stabilizing public debt ratios in the medium term and reducing them thereafter (see Appendix table). As countries with an external surplus apply more fiscal stimulus, private investment and consumption would increase, leading to higher imports and a reduction of global current account imbalances.
With investments targeting higher energy efficiency and production of renewable energy, world energy prices would stabilize on lower levels over the medium run. Meanwhile, investment in sustainable agricultural production would allow meeting a growing demand for food and stabilize world food prices.

A series of temporary income tax relief measures enacted by President George W. Bush in 2001 and 2003. The tax cuts lowered federal income tax rates for everyone, decreased the marriage penalty, lowered capital gains taxes, lowered the tax rate on dividend income, increased the child tax credit from $500 to $1,000 per child, eliminated the phaseout on personal exemptions for higher-income taxpayers and eliminated the phaseout on itemized deductions and eliminated the estate tax.

Investopedia explanation for 'Bush Tax Cuts'

Because the tax cuts were in place for so many years, they began to feel permanent rather than temporary, and taxpayers and politicians raised a major outcry as their expiration date approached. Those who wanted to let the tax cuts expire as scheduled argued that the government needed the extra tax revenue in the face of massive its budget deficits. Those who wanted to extend the tax cuts or make them permanent argued that because taxes reduce economic growth and stifle entrepreneurship and incentives to work, effectively increasing taxes during a recession was a bad idea

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Financial Instruments Directive (Directive 2004/39/EC). References in this Placement Memorandum to the Notes being "listed" (and all related references) shall mean that the Notes have been admitted to trading on Euronext's regulated market and have been admitted to listing by Euronext.
The Notes will be rated AA- by Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. (“Standard & Poor’s”) Aa2 by Moody’s Investors Service Limited (“Moody’s”) and AA by Fitch Ratings Limited (“Fitch”), reflecting the guarantee given by the Guarantor. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. This Placement Memorandum does not constitute a prospectus for the purposes of Directive 2003/71/EC, nor for the purposes of the
Portuguese Securities Code, which sets forth in article 111, no. 1 paragraph a) that a prospectus is not necessary for the issuance of securities guaranteed by a European Union Member State. The Notes will be issued on 19 January 2009 (the “Closing Date”) and will be represented in dematerialised book-entry ("escriturais") form and will be bearer ("ao portador") Notes in the denomination of EUR 50,000 each and tradeable in integral multiples of EUR 50,000 thereafter and will be held through the accounts of affiliate members of the Portuguese central securities depositary and the manager of the Portuguese settlement system, Interbolsa–Sociedade Gestora de Sistemas de Liquidação e de Sistemas Centralizados de Valores Mobiliários, S.A. (“Interbolsa”), as operator and manager of the "Central de Valores Mobiliários" (the “CVM”). Notes traded on Euronext will be accepted for clearing through LCH.Clearnet, S.A., the clearing system operated at Interbolsa as well as through the clearing systems operated by Euroclear Bank S.A./N.V. (“Euroclear”) and Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) and settled by Interbolsa's settlement system. Bookrunners and Joint Lead Managers Banco Espírito Santo de Investimento, S.A. BNP PARIBAS HSBC J.P. Morgan Joint Lead Managers Credit Suisse´B DZ BANK AG Deutsche Zentral -Genossenschaftsbank, Frankfurt am Main
Landesbank Baden-Württemberg Senior Co-Lead Managers
Banco BPI, S.A. Banco Millennium bcp Investimento, S.A. Caixa - Banco de Investimento The date of this Placement Memorandum is 15 January 2009
PLACEMENT MEMORANDUM
Banco Espírito Santo, S.A.
(incorporated with limited liability in Portugal)
EUR 1,500,000,000 3.75 PER CENT. GUARANTEED
UNSUBORDINATED NOTES DUE 2012
Guaranteed by the Republic of Portugal
The EUR 1,500,000,000 3.75 per cent. Guaranteed Unsubordinated Notes due 2012 (the “Notes”) are issued by Banco Espírito
Santo, S.A. (the “Issuer”) and guaranteed by the Republic of Portugal (the “Guarantor”) in the terms set forth in Law no. 60-
A/2008, of 20 October 2008 (“Law 60-A/2008”) and in the Ministerial Order no. 1219-A/2008, of 23 October 2008 (“Ministerial
Order 1219-A/2008”).
The Issuer may, at its option, redeem all, but not some only, of the Notes at any time at their principal amount plus accrued interest,
in the event of certain tax changes as described under Condition 5 of "Conditions of the Notes" herein. The Notes mature on January
2012. Subject as provided below, interest payments on the Notes will not be subject to withholding tax. Under Decree Law no.
193/2005 of 7 November, certain exemptions exist relieving qualifying Noteholders from withholding tax. See "Taxation in
Portugal and Eligibility for the Portuguese Debt Securities Tax Exemption Regime". See also Condition 6 of "Conditions of the
Notes".
Application has been made for the Notes to be listed on the regulated market Eurolist by Euronext Lisbon (“Euronext”), the official
quotation market ("Mercado de Cotações Oficiais") in Portugal. Euronext is a regulated market for the purpose of the Markets in
Financial Instruments Directive (Directive 2004/39/EC). References in this Placement Memorandum to the Notes being "listed"
(and all related references) shall mean that the Notes have been admitted to trading on Euronext's regulated market and have been
admitted to listing by Euronext.
The Notes will be rated AA- by Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. (“Standard &
Poor’s”) Aa2 by Moody’s Investors Service Limited (“Moody’s”) and AA by Fitch Ratings Limited (“Fitch”), reflecting the
guarantee given by the Guarantor. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision,
suspension or withdrawal at any time by the assigning rating organisation.
This Placement Memorandum does not constitute a prospectus for the purposes of Directive 2003/71/EC, nor for the purposes of the
Portuguese Securities Code, which sets forth in article 111, no. 1 paragraph a) that a prospectus is not necessary for the issuance of
securities guaranteed by a European Union Member State.
The Notes will be issued on 19 January 2009 (the “Closing Date”) and will be represented in dematerialised book-entry
("escriturais") form and will be bearer ("ao portador") Notes in the denomination of EUR 50,000 each and tradeable in integral
multiples of EUR 50,000 thereafter and will be held through the accounts of affiliate members of the Portuguese central securities
depositary and the manager of the Portuguese settlement system, Interbolsa–Sociedade Gestora de Sistemas de Liquidação e de
Sistemas Centralizados de Valores Mobiliários, S.A. (“Interbolsa”), as operator and manager of the "Central de Valores
Mobiliários" (the “CVM”).
Notes traded on Euronext will be accepted for clearing through LCH.Clearnet, S.A., the clearing system operated at Interbolsa as
well as through the clearing systems operated by Euroclear Bank S.A./N.V. (“Euroclear”) and Clearstream Banking, société
anonyme (“Clearstream, Luxembourg”) and settled by Interbolsa's settlement system.
Bookrunners and Joint Lead Managers
Banco Espírito Santo de Investimento, S.A. BNP PARIBAS HSBC J.P. Morgan
Joint Lead Managers
Credit Suisse
DZ BANK AG Deutsche Zentral - Genossenschaftsbank, Frankfurt am Main
Landesbank Baden-Württemberg
Senior Co-Lead Managers
Banco BPI, S.A. Banco Millennium bcp Investimento, S.A. Caixa - Banco de Investimento
The date of this Placement Memorandum is 15 January 2009
2
The Issuer (the “Responsible Person”) accepts responsibility for the information contained in this
Placement Memorandum. To the best of the knowledge of the Responsible Person (having taken all
reasonable care to ensure that such is the case) the information contained in this Placement
Memorandum is in accordance with the facts and does not omit anything likely to affect the import
of such information.
This Placement Memorandum is to be read in conjunction with all documents which are deemed to
be incorporated herein by reference (see "Documents Incorporated by Reference"). This Placement
Memorandum shall be read and construed on the basis that such documents are incorporated and
form part of this Placement Memorandum.
The Managers (as defined under “Subscription and Sale”) have not independently verified the
information contained herein. Accordingly, no representation, warranty or undertaking, express or
implied, is made and no responsibility or liability is accepted by the Managers as to the accuracy or
completeness of the information contained or incorporated in this Placement Memorandum or any
other information provided by the Responsible Person in connection with the issue of the Notes.
The Managers do not accept liability in relation to the information contained or incorporated by
reference in this Placement Memorandum or any other information provided by the Responsible
Person in connection with the issue of the Notes.
No person is or has been authorised by the Issuer to give any information or to make any
representation not contained in or not consistent with this Placement Memorandum or any other
information supplied in connection with the issue of the Notes and, if given or made, such
information or representation must not be relied upon as having been authorised by the
Responsible Person and/or the Managers.
Neither this Placement Memorandum nor any other information supplied in connection with the
issue of the Notes (a) is intended to provide the basis of any credit or other evaluation or (b) should
be considered as a recommendation by the Responsible Person or the Managers that any recipient
of this Placement Memorandum or any other information supplied in connection with the issue of
the Notes should purchase any Notes. Each investor contemplating purchasing any Notes should
make its own independent investigation of the financial condition and affairs, and its own appraisal
of the creditworthiness, of the Responsible Person. Neither this Placement Memorandum nor any
other information supplied in connection with the issue of any Notes constitutes an offer or
invitation by or on behalf of the Responsible Person or the Managers to any person to subscribe for
or to purchase any Notes in those jurisdictions where it is unlawful to do so.
Neither the delivery of this Placement Memorandum nor the offering, sale or delivery of any Notes
shall in any circumstances imply that the information contained herein concerning the Responsible
Person is correct at any time subsequent to the date hereof or that any other information supplied
in connection with the issue of the Notes is correct as of any time subsequent to the date indicated in
the document containing the same. The Managers expressly do not undertake to review the
financial condition or affairs of the Responsible Person during the life of the Notes or to advise any
investor in the Notes of any information coming to their attention. Investors should review, inter
alia, the documents incorporated by reference into this Placement Memorandum when deciding
whether or not to purchase any Notes.
The Notes have not been and will not be registered under the United States Securities Act of 1933,
as amended, (the “Securities Act”). Subject to certain exceptions, Notes may not be offered, sold or
delivered within the United States or to U.S. persons (see "Subscription and Sale").
This Placement Memorandum does not constitute an offer to sell or the solicitation of an offer to
buy any Notes in any jurisdiction to any person to whom it is unlawful to make the offer or
solicitation in such jurisdiction. The distribution of this Placement Memorandum and the offer or
sale of Notes may be restricted by law in certain jurisdictions. None of the Responsible Person or
the Managers represent that this Placement Memorandum may be lawfully distributed, or that any
Notes may be lawfully offered, in compliance with any applicable registration or other
requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or
assume any responsibility for facilitating any such distribution or offering. Accordingly, no Notes
may be offered or sold, directly or indirectly, and neither this Placement Memorandum nor any
advertisement or other offering material may be distributed or published in any jurisdiction, except
3
under circumstances that will result in compliance with any applicable laws and regulations.
Persons into whose possession this Placement Memorandum or any Notes may come must inform
themselves about, and observe, any such restrictions on the distribution of this Placement
Memorandum and the offering and sale of Notes. For a description of certain restrictions on offers,
sales and deliveries of the Notes and on the distribution of this Placement Memorandum and other
offering material relating to the Notes, see "Subscription and Sale".
IN CONNECTION WITH THE ISSUE OF THE NOTES, HSBC FRANCE (OR PERSONS
ACTING ON BEHALF OF HSBC FRANCE) MAY OVER-ALLOT NOTES OR EFFECT
TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES
AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER,
THERE IS NO ASSURANCE THAT HSBC FRANCE (OR PERSONS ACTING ON BEHALF OF
HSBC FRANCE) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION
ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC
DISCLOSURE OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED
AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER
THE CLOSING DATE AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE
NOTES. ANY STABILISATION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE
RELEVANT STABILISING MANAGER(S) (OR PERSONS ACTING ON BEHALF OF ANY
STABILISING MANAGER(S)) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND
RULES.
All references to EUR, euro and € refer to the currency introduced at the start of the third stage of
European economic and monetary union pursuant to the Treaty establishing the European
Community, as amended.
4
TABLE OF CONTENTS
Documents Incorporated by Reference............................................................................... 5
Form of the Notes, Clearing Systems, Exercise of Rights and Listing ............................... 6
Conditions of the Notes........................................................................................................ 8
Form of the Guarantee .......................................................................................................18
Use of Proceeds ...................................................................................................................26
Description of the Issuer.....................................................................................................27
Taxation in Portugal and Eligibility for the Portuguese Debt Securities Tax
Exemption Regime..............................................................................................................30
Subscription and Sale .........................................................................................................40
General Information...........................................................................................................42
5
DOCUMENTS INCORPORATED BY REFERENCE
The audited consolidated and non-consolidated financial statements of the Issuer as at and
for the years ended 31 December 2006 and 31 December 2007 and the un-audited consolidated
and non-consolidated financial statements of the Issuer in respect of the six-month period ended
30 June 2008 are incorporated by reference in this Placement Memorandum. Copies of these
documents are available at www.bes.pt and www.cmvm.pt without charge and, during usual
business hours, at the specified office of the Common Representative.
Decision (Despacho) n. 31179/2008, published on 4 December 2008 and issued by the
Secretary of State for Treasury and Finance on 25 November, which authorises the
granting of the Guarantee by the Portuguese State is incorporated reference in this
Placement Memorandum. This Decision is available at http://www.minfinancas.
pt/download_en.asp?num_links=0&link=inf_economica/Portuguese_guarantee_Schem
e_23Oct2008.pdf.
For the avoidance of doubt, uniform resource locators (“URLs”) given in respect of web-site
addresses in this Placement Memorandum are inactive textual references only and it is not
intended to incorporate the contents of any such web sites into this Placement Memorandum nor
should the contents of such web sites be deemed to be incorporated into this Placement
Memorandum.
6
FORM OF THE NOTES, CLEARING SYSTEMS, EXERCISE OF RIGHTS AND
LISTING
Form of the Notes
The Notes will be represented in dematerialised book-entry ("escriturais") form and will be
bearer ("ao portador") Notes in the denomination of EUR 50,000 each and tradeable in integral
multiples of EUR 50,000 thereafter and will be held through the accounts of affiliate members
of the Portuguese central securities depositary and the manager of the Portuguese settlement
system, Interbolsa Sociedade Gestora de Sistemas de Liquidação e de Sistemas Centralizados
de Valores Mobiliários, S.A. (“Interbolsa”), as operator and manager of the "Central de
Valores Mobiliários" (the “CVM”).
Clearing and Settlement
The CVM is the centralised system ("sistema centralizado") for the registration and control
of securities in Portugal, in which all securities in book-entry form admitted to trading on a
Portuguese regulated market must be registered (the “Book-Entry Registry” and each entry a
“Book-Entry”). The CVM is composed of interconnected securities accounts, through which
securities (and inherent rights) are created, held and transferred. This allows Interbolsa to
control the amount of securities created, held and transferred. Issuers of securities, financial
intermediaries which are Affiliate Members of Interbolsa (as defined below) and the Bank of
Portugal, all participate in the CVM.
The CVM provides for all the procedures which allow the owners of securities to exercise
their rights.
In relation to each issue of securities, CVM comprises inter alia, (i) the issue account,
opened by the relevant issuer in the CVM and which reflects the full amount of securities
issued; (ii) the individual accounts, which reflect the securities held by each Affiliate Member
of Interbolsa (as defined below) on behalf of their respective customers; and (iii) the control
accounts opened by each of the financial intermediaries which participate in Interbolsa's
centralised system, and which reflect, at all times, the aggregate nominal amount of securities
held in the individual securities accounts opened by holders of securities with each of the
Affiliate Members of Interbolsa.
Each person shown in the records of an Affiliate Member of Interbolsa as having an
interest in Notes shall be treated as the holder of the principal amount of the Notes recorded.
The expression “Affiliate Member of Interbolsa” means any authorised financial
intermediary entitled to hold control accounts with Interbolsa on behalf of Noteholders and
includes any depository banks appointed by: (i) Euroclear and Clearstream, Luxembourg, for
the purposes of holding accounts on behalf of Euroclear and Clearstream, Luxembourg with
Interbolsa; and (ii) other financial intermediaries that do not hold control accounts directly with
Interbolsa, but which hold accounts with an Affiliate Member of Interbolsa, which in turn has
an account with Interbolsa.
Notes registered with Interbolsa will be attributed an International Securities Identification
Number (“ISIN Code”) through Interbolsa's codification system and will be accepted for
clearing through LCH.Clearnet, S.A., the clearing system operated at Interbolsa as well as
through the clearing systems operated by Euroclear and Clearstream, Luxembourg and settled
by Interbolsa's settlement system.
Exercise of Financial Rights
Payment of principal and interest in respect of the Notes will be subject to Portuguese laws
and regulations, notably the regulations from time to time issued and applied by the Comissão
do Mercado de Valores Mobiliários (Portuguese Securities Market Commission, the “CMVM”)
and Interbolsa.
7
The Issuer must provide Interbolsa with a prior notice of all payments in relation to the
Notes and all necessary information for that purpose. In particular, such notice must contain:
(a) the identity of the financial intermediary integrated in Interbolsa which will act as the
paying agent (the “Paying Agent”) responsible for the relevant payments; and
(b) a statement of acceptance of such responsibility by the Paying Agent.
Interbolsa must notify the Paying Agent of the amounts to be settled, which will be
determined by Interbolsa on the basis of the account balances of the accounts of the Affiliate
Members of Interbolsa.
On the date on which any payment in respect of the Notes is to be made, the corresponding
entries and counter-entries will be made by Interbolsa in the Bank of Portugal current accounts
held by the Paying Agent and by the Affiliate Members of Interbolsa.
Accordingly, payments of principal and interest in respect of the Notes will be (i) credited
by the Issuer in the payment current account held with the Bank of Portugal by the Paying
Agent, (ii) transferred, on the payment date and according to the applicable procedures and
regulations of Interbolsa, from the payment current account held with the Bank of Portugal by
the Paying Agent to the payment current accounts held with the Bank of Portugal by the
Affiliate Members of Interbolsa, and thereafter (iii) transferred by such Affiliate Members of
Interbolsa from the respective payment current accounts held with the Bank of Portugal to the
accounts of the Noteholders or of Euroclear or Clearstream, Luxembourg with said Affiliate
Members of Interbolsa, as the case may be.
Listing
Application has been made for the Notes to be listed on the regulated market of Euronext
Lisbon, Eurolist by Euronext Lisbon, the official quotation market ("Mercado de Cotações
Oficiais") in Portugal.
This Placement Memorandum does not constitute a prospectus for the purposes of
Directive 2003/71/EC, nor for the purposes of the Portuguese Securities Code, which sets forth
in article 111, no. 1 paragraph a) that a prospectus is not necessary for the issuance of securities
guaranteed by a European Union Member State.
8
CONDITIONS OF THE NOTES
The EUR 1,500,000,000 3.75 per cent. Guaranteed Unsubordinated Notes due 2012 (the
“Notes”, which expression shall in these Conditions, unless the context otherwise requires,
include any further notes issued pursuant to Condition 11 and forming a single series with the
Notes) of Banco Espírito Santo, S.A. (the “Issuer”) and unconditionally and irrevocably
guaranteed by the Republic of Portugal (the “Guarantor”) in the terms set forth in Law no. 60-
A/2008, of 20 October 2008 (“Law 60-A/2008”) and in the Ministerial Order no. 1219-A/2008,
of 23 October 2008 (“Ministerial Order 1219-A/2008”) are issued on 19 January 2009 and
subject to and with the benefit of (i) the Agency and Payment Procedures dated 15 January 2009
(such procedures as amended and/or supplemented and/or restated from time to time, the
“Agency and Payment Procedures”) delivered by Banco Espírito Santo, S.A. for the benefit of
the Noteholders as paying agent (the “Paying Agent”) and (ii) a Common Representative
Appointment Agreement dated 15 January 2009 (such agreement as amended and/or
supplemented and/or restated from time to time, the “Common Representative Appointment
Agreement”) made between the Issuer and Vieira de Almeida & Associados – Sociedade de
Advogados R.L. , as common representative (Representante Comum dos Obrigacionistas) (the
“Common Representative”).
The statements in these Conditions include summaries of, and are subject to, the detailed
provisions of and definitions in the Agency and Payment Procedures and in the Common
Representative Appointment Agreement. Copies of the Agency and Payment Procedures and the
Common Representative Appointment Agreement are available for inspection during normal
business hours by the holders of the Notes, as defined hereunder, at the specified office of the
Common Representative. The Noteholders are entitled to the benefit of, are bound by, and are
deemed to have notice of, all the provisions of the Agency and Payment Procedures and the
Common Representative Appointment Agreement applicable to them. References in these
Conditions to the Paying Agent or to the Common Representative shall include any successor
appointed under the Agency and Payment Procedures and under the Common Representative
Appointment Agreement, respectively.
The payment of all amounts in respect of the Notes have been guaranteed by the Guarantor
pursuant to a guarantee (the “Guarantee”) dated 26 November 2008, and executed by the
Guarantor represented by the General Director of Treasury and Finance. The granting of the
Guarantee was duly authorised by decision (Despacho) n. 31179/2008, published on 4
December 2008, issued by the Secretary of State for Treasury and Finance on 25 November
2008 and the renewal of the Guarantee - enabling the issue of the Notes to occur within a two
months period after 26 December 2008 - was authorised by decision (Despacho) n. 2051/2009,
published on 15 January 2009, issued by the Secretary of State for Treasury and Finance on 26
December 2008. The original Guarantee is held by the Common Representative on behalf of,
and copies are available for inspection by, the Noteholders at its specified office.
1. FORM, DENOMINATION, TITLE AND TRANSFER
1.1 Form and Denomination
The Notes will be represented in dematerialised book-entry ("escriturais") form and will be
bearer ("ao portador") Notes, in the denomination of EUR 50,000 each and tradeable in integral
multiples of EUR 50,000 thereafter.
1.2 Title
Title to the Notes held through Interbolsa–Sociedade Gestora de Sistemas de Liquidação e
de Sistemas Centralizados de Valores Mobiliários, S.A. (“Interbolsa”) will be evidenced by
book-entries in accordance with the Portuguese Securities Code ("Código dos Valores
Mobiliários") (the “Portuguese Securities Code”) and the regulations issued by, or otherwise
applicable to, Interbolsa. Each person shown in the book-entry records of a financial institution,
which is licensed to act as a financial intermediary and which is entitled to hold control accounts
9
(each such institution an “Affiliate Member of Interbolsa”), as having an interest in the Notes
shall be the holder of the Notes recorded (each a “Noteholder” and together the
“Noteholders”).
Title to the Notes held through Interbolsa is subject to compliance with all applicable rules,
restrictions and requirements of Interbolsa and Portuguese law.
One or more certificates in relation to the Notes (each, a “Certificate”) will be delivered
by the financial intermediary through which the Notes are held in individual securities accounts
in respect of a registered holding of Notes upon the request by the relevant Noteholder and in
accordance with that Affiliate Member of Interbolsa's procedures pursuant to article 78 of the
Portuguese Securities Code.
The Notes will be registered in the relevant issue account of the Issuer with Interbolsa and
will be held in control accounts opened by each Affiliate Member of Interbolsa on behalf of the
Noteholders. The control account of a given Affiliate Member of Interbolsa will reflect at all
times the aggregate principal amount of Notes held in the individual securities' accounts of the
Noteholders with that Affiliate Member of Interbolsa.
1.3 Holder Absolute Owner
Each Noteholder shall be treated as the absolute owner for all purposes (whether or not it is
overdue and regardless of any notice of ownership, trust or any other interest therein) of any
Note registered in the respective individual securities account held with Affiliate Members of
Interbolsa.
The Issuer, the Guarantor, the Paying Agent and the Common Representative may (to the
fullest extent permitted by applicable laws) deem and treat the person or entity registered in
individual securities account held with Affiliate Members of Interbolsa as the holder of any
Note and the absolute owner for all purposes. Proof of such registration is made by means of a
Certificate issued by the relevant Affiliate Member of Interbolsa pursuant to article 78 of the
Portuguese Securities Code.
1.4 Transfer of Notes
No Noteholder will be able to transfer Notes or any interest therein, except in accordance
with Portuguese laws and regulations. Notes may only be transferred in accordance with the
applicable procedures established by the Portuguese Securities Code and the regulations issued
by the Comissão do Mercado de Valores Mobiliários (Portuguese Securities Market
Commission, the “CMVM”) or Interbolsa, as the case may be, and the relevant Affiliate
Members of Interbolsa through which the Notes are held.
2. STATUS OF THE NOTES AND THE GUARANTEE
2.1 Status of Notes
The Notes are direct, unsubordinated, unconditional and unsecured obligations of the Issuer
and rank and will rank pari passu, without any preference among themselves, with all other
outstanding unsecured and unsubordinated obligations of the Issuer, present and future, save for
such exemptions as may be provided by applicable law.
2.2 Status of the Guarantee
The Guarantee constitutes a direct, unconditional and unsubordinated obligation of the
Guarantor which (a) ranks pari passu and (b) will at all times rank at least pari passu with all
other present and future direct, unconditional and unsubordinated obligations of the Guarantor
save for such obligations as may be preferred by mandatory provisions of law.
Any notification to the Guarantor made under the Guarantee should be made in the
Portuguese language to the address inserted at the end of the Guarantee.
10
3. INTEREST
3.1 Interest Rate and Interest Payment Dates
The Notes bear interest from and including 19 January 2009 at the rate of 3,75 per cent. per
annum (the “Interest Rate”), payable annually in arrear on 19 January (each an “Interest
Payment Date”). The first payment (representing a full year's interest) shall be made on 19
January 2010.
3.2 Interest Accrual
Each Note will cease to bear interest from and including its due date for redemption unless
payment of the principal in respect of the Note is improperly withheld or refused or unless
default is otherwise made in respect of payment, in which event interest shall continue to accrue
until the earlier of:
(a) the date on which all amounts due in respect of such Note have been paid; and
(b) seven (7) days after the date on which the full amount of the moneys payable in
respect of such Notes has been received by the Paying Agent and notice to that
effect has been given to the Noteholders in accordance with Condition 9.
Notwithstanding the above, upon the late payment by the Issuer of any amounts due in
respect of the Notes, the Issuer shall pay interest on such overdue amounts at a rate per annum
of 2 per cent. above the Interest Rate.
3.3 Calculation of Broken Interest
When interest is required to be calculated in respect of a period of less than a full year, it
shall be calculated on the basis of (a) the actual number of days in the period from and including
the date from which interest begins to accrue (the “Accrual Date”) to but excluding the date on
which it falls due divided by (b) the actual number of days from and including the Accrual Date
to but excluding the next following Interest Payment Date.
4. PAYMENTS
4.1 Payments in respect of Notes
Payment of principal and interest in respect of the Notes will be (i) credited by the Issuer in
the payment current account held with the Bank of Portugal by the Paying Agent, (ii)
transferred, on the payment date and according to the applicable procedures and regulations of
Interbolsa, from the payment current account held with the Bank of Portugal by the Paying
Agent to the payment current accounts held with the Bank of Portugal by the Affiliate Members
of Interbolsa, and thereafter (iii) transferred by such Affiliate Members of Interbolsa from the
respective payment current accounts held with the Bank of Portugal to the accounts of the
Noteholders or of Euroclear or Clearstream, Luxembourg with said Affiliate Members of
Interbolsa, as the case may be.
Under the procedures of Interbolsa's settlement system, physical settlement takes place on
the third business day after the trade date and is provisional until the financial settlement that
takes place at the Bank of Portugal on the settlement date.
For the purpose of this Condition and of all other Conditions which establish deadlines for
the making of payments to the Noteholders, a business day shall have the meaning referred to in
Condition 8 below.
4.2 Notification of non-payment
If the Issuer determines that it will not be able to pay the full amount of principal and/or
interest in respect of the Notes on the relevant due date, the Issuer will, in accordance with
Condition 9, forthwith give notice to the Noteholders and to the Common Representative of its
inability to make such payment.
11
4.3 Notification of late payment
If the Issuer or the Guarantor expects to pay the full amount in respect of the Notes at a
date later than the date on which such payments are due, the Issuer, notwithstanding its
obligations in respect of interest on overdue payments set forth in the applicable law and in
Condition 3.2, will, in accordance with Condition 9, give notice of such late payment to the
Noteholders and to the Common Representative.
4.4 Payments subject to Applicable Laws
Payments in respect of principal and interest on the Notes are subject in all cases to any
fiscal or other laws and regulations applicable in the place of payment, but without prejudice to
the provisions of Condition 6.
4.5 Payment Business Day
Noteholders shall not, except as provided in Condition 3, be entitled to any further interest
or other payment for any delay in receiving the amount due as a result of the relevant due date
not being a Payment Business Day.
Payment Business Day means a day which:
(a) is or falls after the relevant due date; and
(b) is a TARGET 2 Settlement Day.
In this Condition, “TARGET 2 Settlement Day” means any day on which the Trans-
European Automated Real-Time Gross Settlement Express Transfer (“TARGET 2”) System is
open for the settlement of payments in Euro.
4.6 Paying Agent
The name of the Paying Agent and its specified office is set out at the end of these
Conditions. The Issuer reserves the right at any time to vary or terminate the appointment of the
Paying Agent and to appoint additional or other paying agents provided that:
(a) there will at all times be a Paying Agent in Portugal capable of making payment in
respect of the Notes as contemplated by these terms and conditions of the Notes,
the Agency and Payment Procedures and applicable Portuguese laws and
regulations; and
(b) the Issuer undertakes that it will ensure that it at all times maintains a Paying Agent
in Member State of the European Union that is not obliged to withhold or deduct
tax pursuant to European Council Directive 2003/48/EC or any law implementing
or complying with, or introduced in order to conform to, such Directive.
Notice of any termination or appointment and of any changes in specified offices will be
given to the Noteholders promptly by the Issuer in accordance with Condition 9.
5. REDEMPTION AND PURCHASE
5.1 Redemption at Maturity
Unless previously redeemed or purchased and cancelled as provided below, the Issuer will
redeem the Notes at their principal amount on 19 January 2012 (the “Reimbursement Date”).
5.2 Redemption for Taxation Reasons
If:
(a) as a result of any change in, or amendment to, the laws or regulations of a Relevant
Jurisdiction (as defined in Condition 6), or any change in the application or official
interpretation of the laws, regulations or administrative rulings of a Relevant
12
Jurisdiction, which change or amendment becomes effective after 19 January 2009,
the Closing Date, on the next Interest Payment Date the Issuer would be required to
pay additional amounts as provided or referred to in Condition 6; and
(b) the requirement cannot be avoided by the Issuer taking reasonable measures
available to it,
the Issuer may at its option, having given not less than 30 nor more than 60 days' notice to
the Noteholders in accordance with Condition 9 (which notice shall be irrevocable), redeem all
the Notes, but not some only, at any time at their principal amount together with interest accrued
to but excluding the date of redemption, provided that no such notice of redemption shall be
given earlier than 90 days prior to the earliest date on which the Issuer would be required to pay
such additional amounts, were a payment in respect of the Notes then due. Prior to the
publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver to the
Paying Agent and, where the Paying Agent and the Issuer are the same entity, to the Common
Representative, a certificate signed by two Directors of the Issuer stating that the requirement
referred to in (a) above will apply on the next Interest Payment Date and setting forth a
statement of facts showing that the conditions precedent to the right of the Issuer so to redeem
have occurred and an opinion of independent legal advisers of recognised standing to the effect
that the Issuer has or will become obliged to pay such additional amounts as a result of the
change or amendment.
5.3 Purchases
The Issuer or any of its Subsidiaries may at any time purchase Notes in any manner and at
any price in accordance with Portuguese law.
All Notes that are purchased by the Issuer or any of its Subsidiaries should be cancelled
pursuant to Condition 5.4 below.
Notes so purchased, while held by or on behalf of the Issuer or any of its Subsidiaries, shall
not entitle the holder to vote at any meetings of the Noteholders and shall not be deemed to be
outstanding for the purposes of calculating quorums at meetings of the Noteholders or for the
purposes of Condition 9.1 or the Agency and Payment Procedures.
In this Condition, “Subsidiary” means any entity in respect of which another entity (i)
holds (directly or indirectly) the majority of the voting rights or (ii) has (directly or indirectly)
the right to appoint or remove a majority of the board of directors or (iii) holds (directly or
indirectly) the majority of the share capital.
5.4 Cancellations
All Notes which are (a) redeemed or (b) purchased by or on behalf of the Issuer or any of
its Subsidiaries shall forthwith be cancelled by Interbolsa, following receipt by Interbolsa of
notice thereof by the Paying Agent, and accordingly said Notes may not be held, reissued or
resold and shall not entitle the holder to vote at any meetings of the Noteholders and shall not be
deemed to be outstanding for the purposes of calculating quorums at meetings of the
Noteholders or for the purposes of Condition 10.1 or of the Agency and Payment Procedures.
5.5 Notices Final
Upon the expiry of any notice as is referred to in Condition 5.2 above the Issuer shall be
bound to redeem the Notes to which the notice refers in accordance with the terms of such
Condition.
6. TAXATION
6.1 Payment of Interest without withholding
Subject to the terms and conditions described in “Taxation in Portugal and Eligibility for
the Portuguese Debt Securities Tax Exemption Regime”, all payments in respect of the Notes by
13
or on behalf of the Issuer or the Guarantor will be made without withholding or deduction for,
or on account of, any present or future taxes, duties, assessments or governmental charges of
whatever nature (“Taxes”) imposed or levied by or on behalf of the Relevant Jurisdiction,
unless the withholding or deduction of such Taxes is required by law. In such event, the Issuer
or, as the case may be, the Guarantor will pay such additional amounts as will result in the
receipt by the relevant Noteholders of such amounts as would be received by them had no such
withholding or deduction been required, except that no additional amounts shall be payable in
relation to any payment in respect of any Note:
(a) to, or to a third party on behalf of, a Noteholder who is liable to the Taxes in
respect of the Note by reason of having some connection with the Relevant
Jurisdiction other than the mere holding of the Note; or
(b) where such withholding or deduction is imposed on a payment to an individual and
is required to be made pursuant to European Council Directive 2003/48/EC or any
other EC law or domestic law implementing or complying with, or introduced in
order to conform to, such Directive; or
(c) to, or to a third party on behalf of, a Noteholder in respect of whom the information
(which may include certificates) required in order to comply with Decree-Law
193/2005 of 7 November, and any implementing legislation, is not received by no
later than the second ICSD Business Day prior to the Relevant Date, or which does
not comply with the formalities in order to benefit from tax treaty benefits, when
applicable; or
(d) to, or to a third party on behalf of, a Noteholder resident for tax purposes in the
Relevant Jurisdiction, or a resident in a tax haven jurisdiction as defined in Order
150/2004, of 13 February 2004 (Portaria do Ministro das Finanças e da
Administração Pública n.150/2004) as amended from time to time, issued by the
Portuguese Minister of Finance and Public Administration, with the exception of
central banks and governmental agencies located in those blacklisted jurisdictions,
or a non-resident legal entity held, directly or indirectly, in more than 20 per cent.
by entities resident in the Republic of Portugal; or
(e) to, or to a third party on behalf of, (i) a Portuguese resident legal entity subject to
Portuguese corporation tax (with the exception of entities that benefit from a
waiver of Portuguese withholding tax or from Portuguese income tax exemptions),
or (ii) a legal entity not resident in Portugal acting with respect to the holding of the
Notes through a permanent establishment in Portugal.
6.2 Interpretation
In this Condition 6:
(a) “ICSD Business Day” means any day which is a TARGET 2 Settlement Day in
any year.
(b) “Relevant Date” means the date on which the payment first becomes due but, if
the full amount of the money payable has not been received by the Paying Agent
on or before the due date, it means the date on which, the full amount of the money
having been so received, notice to that effect has been duly given to the
Noteholders by the Issuer in accordance with Condition 9.
(c) “Relevant Jurisdiction” means the Republic of Portugal or any political
subdivision or any authority thereof or therein having power to tax or any other
jurisdiction or any political subdivision or any authority thereof or therein having
power to tax to which the Issuer or the Guarantor, as the case may be, becomes
subject in respect of payments made by it of principal and interest on the Notes.
14
(d) “Noteholder” means the effective beneficiary of the income attributable to the
relevant Note.
6.3 Additional Amounts
Any reference in these Conditions to any amounts in respect of the Notes shall be deemed
also to refer to any additional amounts which may be payable under this Condition 6 or under
any undertakings given in addition to, or in substitution for, this Condition 6.
7. PRESCRIPTION
Notes will become void unless presented for payment within periods of 20 years (in the
case of principal) and five years (in the case of interest) from the Relevant Date in respect of the
Notes subject to the provisions of Condition 4.
8. EVENTS OF DEFAULT
8.1 Events of Default
The holder of any Note may give notice to the Issuer that the Note is, and it shall
accordingly forthwith become, immediately due and repayable at its principal amount, together
with interest accrued to the date of repayment, if any of the following events (“Events of
Default”) shall have occurred and be continuing:
(a) if default is made in the payment of any principal or interest amount due in respect
of the Notes or any of them and the default continues for a period of 10 (ten)
business days; or
(b) if the Issuer, or the Guarantor on behalf of the Issuer, fails to perform or observe
any of its other obligations under these Conditions and (except in any case where
the failure is incapable of remedy, when no continuation or notice as is hereinafter
mentioned will be required) the failure continues for the period of 30 (thirty)
consecutive days following the service by any Noteholder or by the Common
Representative on the Issuer of notice requiring the same to be remedied; or
(c) the repayment of any indebtedness owing by the Issuer is accelerated by reason of
default and such acceleration has not been rescinded or annulled, or the Issuer
defaults (after whichever is the longer of any originally applicable period of grace
and 14 days after the due date) in any payment of any indebtedness or in the
honouring of any guarantee or indemnity in respect of any indebtedness provided
that no such event shall constitute an Event of Default unless the indebtedness,
and/or the amounts payable under any such guarantee and/or indemnity, whether
alone or when aggregated with other indebtedness relating to all (if any) other such
events which shall have occurred shall exceed U.S.$10,000,000 (or its equivalent
in any other currency or currencies) or, if greater, an amount equal to one per cent.
of the Issuer’s Shareholders’ Funds;
For the purposes of this paragraph “Issuer’s Shareholders’ Funds” means, at any
relevant time, a sum equal to the aggregate of the Issuer’s shareholders’ equity as
certified by the Issuer’s auditors by reference to the latest audited consolidated
financial statements of the Issuer.
(d) if the Issuer ceases or announces an intention to cease to carry on the whole or a
substantial part of its business other than for the purposes of reorganisation, merger
or reconstruction on terms previously approved by an Extraordinary Resolution (as
defined below in this Condition) taken by the Noteholders; or
(e) the Issuer stops payment or shall be unable to, or shall admit inability to, pay its
debts as they fall due, or shall be adjudicated or found bankrupt or insolvent by a
court of competent jurisdiction or if the Issuer makes a conveyance or assignment
for the benefit of, or enters into any composition or other arrangement with, its
15
creditors generally (or any class of its creditors) or if any meeting is convened to
consider a proposal for an arrangement or composition with its creditors generally
(or any class of its creditors); or
(f) a receiver, trustee or other similar official shall be appointed in relation to the
Issuer or in relation to the whole or a substantial part of the Issuer or a temporary
manager of the Issuer is appointed by the Bank of Portugal or an encumbrancer
shall take possession of the whole or a substantial part of the assets of the Issuer, or
a distress or execution or other process shall be levied or enforced upon or sued out
against the whole or a substantial part of the assets of the Issuer and in any of the
foregoing cases it or he shall not be discharged within 60 days; or
(g) the Issuer sells, transfers, lends or otherwise disposes of the whole or a major part
of its undertaking or assets (including shareholdings in its subsidiaries or
associated companies) and such disposal is substantial in relation to the assets of
the Issuer and its subsidiaries as a whole, other than selling, transferring, lending or
otherwise disposing on an arm’s length basis; or
(h) if any order is made by any competent court or resolution passed for the winding
up or dissolution of the Issuer (other than for the purposes of merger,
reconstruction or reorganisation on terms approved in writing by an Extraordinary
Resolution of the Noteholders).
In these Conditions “business days” means a day on which commercial banks are open
for general business in Lisbon or a day on which the TARGET System is open.
In these Conditions, “Extraordinary Resolution” means a Resolution concerning a
Reserved Matter or concerning any other matter in respect of which the Conditions
require an Extraordinary Resolution to be passed.
In these Conditions and in the Common Representative Appointment Agreement
“Reserved Matter” means any proposal:
(a) to change any date fixed for payment of principal or interest in respect of the
Notes, to reduce the amount of principal or interest due on any date in respect of
the Notes or to alter the method of calculating the amount of any payment in
respect of the Notes on redemption or maturity;
(b) to change the currency in which amounts due in respect of the Notes are payable;
(c) for modification or abrogation of certain provisions of these Conditions or the
Notes;
(d) for the acceleration of the obligations under the Notes; and
(e) to amend this definition.
9. NOTICES
Notices to the Noteholders shall be valid, so long as the Notes are listed on Euronext and
the rules of Euronext Lisbon so require, if published on the Euronext Lisbon bulletin and made
available at www.cmvm.pt of the CMVM. Any such notice shall be deemed to have been given
on the date of such publication or, if published more than once or on different dates, on the first
date on which publication is made, as provided above.
The Issuer shall also ensure that notices are duly published in a manner which complies
with the rules and regulations of any stock exchange, or the relevant authority, on which the
Notes are for the time being listed. Without prejudice to the preceding sentence, if the Notes
16
cease to be listed on Euronext, all notices to the Noteholders will be valid if mailed to them at
their respective addresses recorded in the respective register of Noteholders of the Affiliated
Members of Interbolsa through which the Notes are held. Any notice shall be deemed to have
been given on the date of publication or, if so published more than once or on different dates, on
the date of the first publication, or, if applicable, on the day after being so mailed.
10. COMMON REPRESENTATIVE,MEETINGS OF NOTEHOLDERS AND MODIFICATION
10.1 Common Representative appointment
Each initial subscriber of the Notes, by subscribing and paying for the Notes, agrees (i) to
appoint Vieira de Almeida & Associados - Sociedade de Advogados, R.L. as Common
Representative of the Noteholders (the “Common Representative”), in the terms and for the
purposes stated in article 358 of the Código das Sociedades Comerciais, enacted by Decree Law
No. 262/86, of 2 September 1986, (the “Portuguese Companies Code”) (ii) and to delegate in
the Issuer the powers and authority to enter into the Common Representative Appointment
Agreement and to further determine the terms and conditions of such appointment of the
Common Representative.
10.2 Meetings of Noteholders
Meetings of the Noteholders to consider any matter affecting their interests, including the
modification or abrogation of any of these Conditions by Extraordinary Resolution (as defined
in Condition 8 above) and the appointment or dismissal of a Common Representative are
governed by the Portuguese Companies Code enacted by Decree-Law no. 262/86, of 2
September, as amended and by the Common Representative Appointment Agreement. Meetings
may be convened by the Common Representative or by the chairman of the general meeting of
shareholders of the Issuer before the appointment of, or in case of refusal to convene the
meeting by, the Common Representative, and shall be convened if requested by Noteholders
holding not less than 5 per cent. in principal amount of the Notes for the time being outstanding.
The quorum required for a meeting convened to pass a resolution other than an Extraordinary
Resolution will be any person or persons holding or representing any of the Notes then
outstanding, independent of the principal amount thereof; and an Extraordinary Resolution will
require the attendance of a person or persons holding or representing at least 50 per cent. of the
Notes then outstanding or at any adjourned meeting, any person or persons holding or
representing any of the Notes then outstanding, independent of the principal amount thereof.
The majority required to pass a resolution other than an Extraordinary Resolution is the
majority of the votes cast at the relevant meeting; the majority required to pass an Extraordinary
Resolution, including, without limitation, a resolution relating to the modification or abrogation
of certain of the provisions of these Conditions, is at least 50 per cent. of the principal amount of
the Notes then outstanding or, at any adjourned meeting, two-thirds of the votes cast at the
relevant meeting. Resolutions passed at any meeting of the Noteholders will be binding on all
Noteholders, whether or not they are present at the meeting or have voted against the approved
resolutions.
10.3 Dismissal and substitution of the Common Representative
The Noteholders may dismiss and substitute the Common Representative by way of a
Resolution passed for such purpose upon the terms and conditions in the Common
Representative Appointment Agreement.
10.4 Notification to the Noteholders
Any modification, abrogation, waiver or authorisation in accordance with this Condition 10
shall be binding on the Noteholders and shall be notified by the Issuer to the Noteholders
promptly thereafter in accordance with Condition 9.
11. Further Issues
17
The Issuer is at liberty from time to time without the consent of the Noteholders to create
and issue further notes or bonds but subject to confirmation that the Guarantee will apply to
such further notes or bonds, either (a) ranking pari passu in all respects (or in all respects save
for the first payment of interest thereon) and so that the same shall be consolidated and form a
single series with the outstanding notes or bonds of any series (including the Notes) or (b) upon
such terms as to ranking, interest, conversion, redemption and otherwise as the Issuer may
determine at the time of the issue.
12. GOVERNING LAW AND SUBMISSION TO JURISDICTION
12.1 Governing Law
The Notes, the Agency and Payment Procedures, the Common Representative
Appointment Agreement and the Guarantee and any non-contractual obligations arising out of
or in connection with them, are governed by, and will be construed in accordance with,
Portuguese law.
12.2 Jurisdiction
The courts of Portugal shall have jurisdiction to settle any proceedings arising out of or in
connection with the Notes, the Agency and Payment Procedures, the Common Representative
Appointment Agreement and/or the Guarantee and any non-contractual obligations arising out
of or in connection with them.
18
FORM OF THE GUARANTEE
GARANTIA
da
República Portuguesa
(o “Garante”)
relativa a
Obrigações Garantidas não subordinadas de taxa fixa,
no valor até EUR 1.500.000.000.
Emitidas por
Banco Espírito Santo, S.A.
(O “EMITENTE”)
Em que intervieram
BNP Paribas
HSBC France
J.P. Morgan Securities Ltd.
Banco Espírito Santo de Investimento, S.A.
Na qualidade de “LEAD MANAGERS”
19
Cláusula 1.ª
Obrigações do Garante
1. Nos termos da Lei n.º 60-A/2008, de 20 de Outubro (“Lei n.º 60-A/2008”), a República
Portuguesa (“Garante”), pela presente, garante incondicional, ou seja, nos exactos termos e
condições da obrigação do devedor principal, e irrevogavelmente, a favor de qualquer
detentor das Obrigações, seus sucessores e cessionários, o pagamento atempado dos
montantes correspondentes ao capital e juros exigíveis (as “Obrigações Garantidas”) ao
abrigo das Condições das Obrigações (“CONDITIONS OF THE NOTES” constantes do
“PLACEMENT MEMORANDUM”), cuja minuta se anexa à presente Garantia e dela faz
parte integrante.
2. Os termos definidos nas Condições das Obrigações têm o mesmo significado quando
utilizados nesta Garantia.
3. O objectivo da presente Garantia é assegurar o cumprimento das obrigações do EMITENTE
previstas nas Condições das Obrigações.
4. O Garante, pela presente, renúncia incondicional e irrevogavelmente ao benefício de
excussão prévia dos bens do EMITENTE, nos termos e para os efeitos do disposto na alínea
a) do artigo 640.º do Código Civil Português.
5. Pela presente, a República Portuguesa garante, a qualquer momento, que as
responsabilidades actuais e contingentes, constituem obrigações directas e não
subordinadas do Garante concorrendo a pari-passu com todas as outras responsabilidades,
presentes ou futuras, do Garante à excepção daquelas que por lei beneficiem de
preferência.
Cláusula 2.ª
Execução da Garantia
1. O Garante tem a faculdade de substituir o EMITENTE no pagamento das Obrigações
Garantidas nas datas devidas, devendo para o efeito o EMITENTE informar previamente o
Garante, sob pena de responsabilidade pelos danos que venham a resultar da sua omissão,
de que não se encontra habilitado a satisfazer os encargos com o capital e juros nas datas
fixadas contratualmente, deste modo evitando o vencimento antecipado da totalidade das
obrigações assumidas pelo EMITENTE nos termos das Condições das Obrigações.
2. A Garantia é accionada por qualquer Obrigacionista ou pelo seu representante sempre que o
EMITENTE incumprir o pagamento, total ou parcial, de qualquer Obrigação Garantida, nas
datas devidas.
3. O Garante assegura, pela presente, que efectuará todos os pagamentos respeitantes às
Obrigações Garantidas à primeira notificação de qualquer Obrigacionista ou do seu
representante e após confirmação de que o montante reclamado ao Garante é equivalente ao
montante que o EMITENTE não pagou em tempo devido.
4. O Garante só pode ser chamado a executar a Garantia à primeira notificação feita por
qualquer Obrigacionista ou pelo seu representante, sendo apenas responsável pelos juros de
mora que decorram a partir da data da primeira notificação ao Garante realizada por correio
registado, fax, correio electrónico ou qualquer outro meio permitido pela lei portuguesa.
5. Em caso de execução da garantia, o Estado concorre com os demais credores do EMITENTE,
pelas quantias que tiver efectivamente dispendido, a qualquer título, em razão da garantia
concedida, nos termos gerais previstos no artigo 604.º do Código Civil Português, não
sendo aplicável o disposto no n.º 1 do artigo 22.º da Lei n.º 112/97, de 16 de Setembro em
conformidade com o previsto no artigo 9.º da Lei n.º 60-A/2008, de 20 de Outubro.
Cláusula 3.ª
20
Alterações dos Termos e Condições das Obrigações Garantidas
1. Qualquer alteração às Obrigações Garantidas previstas nas Condições das Obrigações está
sujeita a aprovação prévia do Garante.
2. O Garante apenas pode recusar a sua aprovação quando as alterações sejam passíveis de
afectar as suas responsabilidades no âmbito da Garantia.
Cláusula 4.ª
Compromissos
O Garante assegura aos detentores das obrigações que:
i. a emissão da Garantia foi devidamente aprovada e autorizada, de acordo com a Lei
n.º 60-A/2008, bem como de quaisquer outras leis e regulamentos aplicáveis;
ii. a Garantia foi devidamente assinada; e
iii. o cumprimento das suas obrigações, no âmbito da Garantia, é válido, legal e
exigível nos termos da Lei n.º 60-A/2008, bem como de quaisquer outras leis e
regulamentos aplicáveis.
Cláusula 5.ª
Regime Jurídico
1. Os direitos e deveres emergentes desta Garantia são exclusivamente regidos pela Lei
portuguesa.
2. O local de cumprimento das obrigações do Garante é Lisboa e o Garante elege o Tribunal da
Comarca de Lisboa como o tribunal competente em caso de litígio.
3. Ao abrigo e na medida do permitido pela Lei portuguesa, o Garante declara que não dispõe
de qualquer prerrogativa ou direito especial, de natureza processual ou patrimonial, face às
demais partes passível de ser invocado em Tribunal.
Cláusula 6.ª
Duração da Garantia
1. A Garantia entra em vigor na data da sua assinatura e expira 30 (trinta) Dias Úteis, conforme
abaixo definidos, após a última Data de Pagamento de Juros e de Reembolso do Capital
estipulada nas Condições das Obrigações, sem prejuízo da subsistência da obrigação de
pagamento das Obrigações Garantidas que tenham sido accionadas antes dessa data.
2. Independentemente do disposto no número anterior, caso os Obrigacionistas, após termo da
garantia, sejam obrigados a devolver as quantias recebidas em pagamento dos seus créditos
em resultado de um processo de insolvência ou de qualquer processo judicial, a Garantia
recupera imediatamente a sua vigência e plena eficácia.
Dia Útil significa um dia em que os Bancos estejam abertos ao público em Lisboa.
A Garantia está redigida em língua Portuguesa
A Garantia está feita em seis exemplares de cada versão, cada um deles valendo como um
original, destinando-se um deles ao Garante, um para cada “Lead Managers” e o outro ao
Emitente.
21
Lisboa, 26 de Novembro, 2008
O DIRECTOR-GERAL DO TESOURO E FINANÇAS
Carlos Durães da Conceição
[O representante autorizado do Garante no uso das competências que lhe são atribuídas pelo
despacho do Ministro de Estado e das Finanças de 24 de Novembro de 2008].
Morada para comunicações: Direcção-Geral do Tesouro e Finanças
Rua da Alfândega, 5-1º
1149 – 008 Lisboa
Portugal
Telefone – 21 88 46 000 Fax – 21 884 6200
E-mail – apoiosfinanceiros@dgtf.pt
22
GUARANTEE
of
the Republic of Portugal
(the “Guarantor”)
relating to
fixed rate unsubordinated Guaranteed Notes
in the amount of up to EUR 1,500,000,000
Issued by
Banco Espírito Santo, S.A.
(the “Issuer”)
in which there intervened
BNP Paribas
HSBC France
J.P. Morgan Securities Ltd.
Banco Espírito Santo de Investimento, S.A.
In the quality of “Lead Managers”
23
Clause 1
Guarantor’s Obligation
1. In accordance with Law n.º 60-A/2008, of 20 October (“Law 60-A/2008”), the Republic
of Portugal hereby unconditionally, in the exact terms and conditions of primary debtor,
and irrevocably guarantees in favor of any holder of the Notes and any of its successors
and assignees the due payment of the amounts corresponding to the principal and interests
payable by the Issuer (the “Guaranteed Obligations”) pursuant to the terms of the
Conditions of the Notes (“CONDITIONS OF THE NOTES” included in the
“PLACEMENT MEMORANDUM”), the draft of which is attached hereto and are part of
this Guarantee.
2. The terms defined under the Conditions will have the same meaning when used in this
Guarantee.
3. The purpose of this Guarantee is to ensure the compliance of the obligations of the Issuer
set forth in the Conditions of the Notes.
4. The Guarantor under the present guarantee unconditionally and irrevocably waives its
right to require enforcement to be directed against of the Issuers assets before the
enforcement of the Guarantee (renúncia ao benefício da excussão prévia), under the terms
and for the purposes set forth in sub paragraph a) of Article 640 of the Portuguese Civil
Code.
5. Under this Guarantee, the Portuguese Republic ensures at any time that the present and
future responsibilities, assumed under this Guarantee, will constitute direct and
unsubordinated obligations of the Guarantor which rank pari passu with all other present
or future obligations of the Guarantor, save for such obligations as may be preferred by
mandatory provisions of law.
Clause 2
Guarantee’s Enforcement
1. The Guarantor has the right to replace the ISSUER in the payment of the Guaranteed
Obligations on the relevant due dates and the ISSUER has the obligation to previously
inform the Guarantor when not being able to comply with the payment obligations of
principal and interest due on the contractually established dates, otherwise being liable for
the damages which may occur as consequence of its omission, thus avoiding the early
maturity of all the ISSUER’S obligations, under the Conditions of the Notes.
2. The Guarantee shall be enforced by any holder of the Notes or by its representative
whenever the ISSUER fails to pay, in whole or in part, any Guaranteed Obligation on the
corresponding due dates.
3. The Guarantor guarantees, under the terms of this Guarantee, that it will perform all the
payments regarding the Guaranteed Obligations on a first notification by any holder of
the Notes or its representative and upon confirmation that the amount claimed to the
Guarantor corresponds to the amount the ISSUER did not pay in due time.
4. The Guarantor may only be called to enforce the Guarantee following a first notification
by any holder of the Notes or its representative, being solely responsible for the default
interests which accrue from the date of the first notification to the Guarantor sent by
registered mail, fax, electronic mail or any other means allowed by Portuguese Law.
5. In case of enforcement of the Guarantee, the State shall rank against the ISSUER’S
remaining creditors regarding the expenses actually incurred by it, on whatever grounds,
as a consequence of the granting of the Guarantee, pursuant to the general rule set forth in
article 604 of the Portuguese Civil Code, albeit paragraph 1. of article 22 of Law nr.
24
112/97 of September 16th not being applicable in accordance to article 9 of Law nr. 60-
A/2008, of October 20th.
Clause 3
Amendments to the Guaranteed Obligations Terms and Conditions
1. Any amendments to the Conditions of the Notes is subject to prior approval of the
Guarantor.
2. The Guarantor may only refuse its approval should the amendments be capable of
affecting its responsibilities under the terms of this Guarantee.
Clause 4
Undertakings
The Guarantor undertakes to the holders of the Notes that:
i. the issue of the Guarantee has been duly approved and authorized, in accordance
with Law no. 60-A/2008, as well as any other applicable laws and regulations;
ii. the Guarantee has been duly signed; and
iii. the performance of the Guarantor’s obligations, under the term of this Guarantee, is
valid, legal and enforceable under the terms of Law no. 60-A/2008, as well as any
other applicable laws and regulations.
Clause 5
Legal Framework
1. The rights and obligations arising out of this Guarantee are exclusively subject to
Portuguese Law.
2. The Guarantor’s obligations must be performed in Lisbon and the courts of Lisbon shall
have jurisdiction to settle any disputes.
3. Under the terms and as permitted by Portuguese Law, the Guarantor declares that it does
not hold any prerogative or special right, be it procedural or patrimonial, towards the
remaining parties capable of being raised in Court.
Clause 6
Duration of the Guarantee
1. This Guarantee enters into force upon its execution date and it shall expire 30 (thirty)
Working Days, as defined below, after the last Interest Payment Date and Reimbursement
Date set forth in the Conditions of the Notes, without prejudice to the maintenance of the
obligation to pay the Guaranteed Obligations which enforcement has been triggered
before that date.
2. Irrespective of paragraph 1 above, should the Holders of the Notes, once the Guarantee
has expired, be obliged to return the amounts received as payment of its credits, as a
result of an insolvency or any other judicial procedure, the Guarantee will immediately
recover its effectiveness and full force.
Working Day means any day on which the banks are open to the public in Lisbon.
The guarantee is written in two versions, one in the Portuguese language and the other in the
English language. In the event of a conflict between the two versions, the Portuguese version
shall prevail.
25
The Guarantee is executed in six samples of each version, each one with the validity of an
original copy, one being for the Guarantor, another for each “Lead Manager” and one for the
Issuer.
Lisbon, 26 November, 2008
The GENERAL DIRECTOR OF THE TREASURY AND FINANCE
Carlos Durães da Conceição
[The Guarantor’s authorized representative within the powers granted by decision (Despacho)
of the Ministry of State and Finance, dated 24 November, 2008].
Notices: Direcção-Geral do Tesouro e Finanças
Rua da Alfândega, 5-1º
1149-008 Lisboa
Telephone – 21 88 46 000 Fax – 21 884 62 00
E-mail – apoiosfinanceiros@dgtf.pt
26
USE OF PROCEEDS
The net proceeds of the issue of the Notes, amounting to approximately EUR
1,494,705,000 will be applied by the Issuer for general financing requirements in the course of
the Issuer’s general corporate purposes, which include making a profit.
27
DESCRIPTION OF THE ISSUER
Background
Banco Espírito Santo, S.A. (“BES”) is a bank incorporated in Portugal (with registered number
500852367) on 26 September 1990 for an unlimited duration and with limited liability
(sociedade anónima). BES Group offers a full range of banking and financial services,
including taking deposits, lending, asset management, leasing and factoring, investment banking
and brokerage services. BES Group has a particular focus on its home market in Portugal. It
also serves clients in Spain, Brazil, Angola, France, the United Kingdom, the United States and
Macao.
History and Ownership
BES’s origins date from 1884, when José Maria do Espírito Santo e Silva, among others,
founded its predecessor bank in Lisbon. After the Second World War, BES became one of
Portugal’s largest commercial banks under the direction and leadership of the Espírito Santo
family. In 1975, virtually all institutions in the banking and insurance industries, including BES,
were nationalised by the Portuguese government. The Espírito Santo family, deprived of its
Portuguese base, began operations outside Portugal, primarily in the financial services market.
In 1986, the Portuguese government embarked upon a privatisation programme, creating the
conditions for the return of the Espírito Santo Group to Portugal. After banking activities were
again opened to private initiative, the Espírito Santo Group, under a joint venture with Crédit
Agricole and supported by a core of Portuguese shareholders, set up Banco Internacional de
Crédito (“BIC”), thus marking the Espírito Santo Group’s return to Portugal. That same year,
the Espírito Santo Group acquired Espírito Santo Sociedade de Investimento (the precursor of
BES Investimento), with the participation of Union de Banques Suisses and Kredietbank
(Luxembourg), among other financial institutions.
In 1991, BES (formerly incorporated in Portugal as BESCL) was re-privatised and Espírito
Santo Financial Group (“ESFG”) and Crédit Agricole acquired stakes in its share capital. ESFG
and its subsidiaries hold 42.60 per cent. of the voting rights in BES and consolidates BES in its
financial statements. Crédit Agricole is a shareholder investor in BES and is the ESFG’s
strategic partner in BES’s management and operation, particularly in connection with the
development of products in the retail sector. The general public, including institutional
investors, owns approximately 43.5 per cent. of BES’s ordinary shares. BES’s ordinary shares
are listed on Eurolist by Euronext Lisbon.
Activities - Overview
The financial services offered by the BES Group include wholesale and retail deposit-taking,
commercial, mortgage and consumer lending, funds transfers, credit and debit card facilities,
foreign exchange, distribution of mutual funds, trading and investment of securities and
providing securities custody services. In addition to traditional banking services, the BES
Group, through its subsidiaries and other related entities, also engages in various
complementary activities, such as leasing, factoring, asset management and the sale of life and
non-life insurance products.
The BES Group is made up of two categories of companies: (a) operational units – companies
providing financial services; and (b) outsourcing and other units – companies providing support
services to other BES Group companies and the BES Group’s external clients. This breakdown
also forms the basis of the BES Group’s segment reporting.
Business Sectors
The BES Group is one of the leading banking groups in Portugal, offering individual and
corporate customers a wide range of banking and financial services. The BES Group is the third
28
largest provider of financial services in Portugal (in terms of assets) and has a diversified
distribution network made up of branches, corporate centres and private banking centres to
serve customers in various countries, with a strategic focus on the countries of the Atlantic basin
(Portugal, Spain and Brazil).
Retail
Through its distribution network of 700 branches in Portugal, BES Group offers a
comprehensive range of banking and financial products and services to its retail customers.
In addition to this core set of banking and financial products and services, the BES Group offers
retail customers products developed by BES’s subsidiaries and affiliates. The BES Group
engages in cross-selling of products to leverage its brand recognition and attract new customers.
Affluent individual clients have access to permanent support from dedicated account managers
and are able to choose from tailored products and financial solutions and individualised
financial planning. One example of the type of personalised service offered to affluent
individual clients is “BES 360º Map”, a financial planning tool that aligns asset allocation with
client profile. Small business clients are also provided with a wide range of individually tailored
banking products and financial solutions.
Private Banking
The BES Group provides its private banking customers with all products available to the retail
customers. In addition, the private banking customers have a benefit of a more focused,
individually tailored personalised financial advisory and asset planning services.
The BES Group develops its private banking activity in Portugal through a network of 29
Private Banking centres. In addition, the BES Group is pursuing development in international
private banking in order to reach the Portuguese communities abroad as well as the markets
with affinities with Portugal. In particular, the BES Group offers its private banking services
overseas through its Madeira offshore branch, Spanish Branch and Espírito Santo Bank (Florida,
USA).
Corporate
The BES Group offers corporate customers a full range of banking products. The services are
tailored to address the needs of clients in each of the following segments: middle market, large
corporations, international corporate and municipalities and institutional clients. The products
offered by BES Group to its corporate customers include standard lending and capital markets
related finance products, electronic banking and cash management, financial advisory services,
derivative instruments and trade finance products. BES Group has also implemented such
innovative products as ‘‘á la card”, a meal voucher in the form of a pre-paid card available to
the employees of BES’s corporate customers, and personal business cards which can be used
both as a company card and for personal expenses.
Investment Banking
The BES Group is one of the leading providers of investment banking services in Portugal. The
investment banking segment offers the BES Group’s clients a wide range of specialised
products and services, including advisory services in mergers and acquisitions, access to capital
market transactions (equity and debt), brokerage and portfolio management services, leverage
and project finance transactions and private equity.
The investment banking business strategy is based on two main purposes: (i) maintaining a
leading position in the Portuguese market and (ii) carrying out a selective expansion of
international activities, compatible with a sustained growth of results.
In Portugal, BES Investimento remained a reference player in the various areas of investment
banking, specifically in financial advisory services, capital markets, structured finance and
private equity. In 2007 the Bank was market leader, by number and amount of operations, in
29
Mergers and Acquisitions, maintained a prominent position in brokerage, and participated in all
the main capital markets operations. In the main geographies where the Bank operates, a
significant effort was made to accelerate activity growth. In Brazil, the Bank took part in several
capital markets operations, initiated Structured Credit activities and saw the work of its equity
research team rewarded by the 7th place in the ranking of the Institutional Investor magazine. In
Spain the Bank remained high up in the ranking of brokerage houses (6th place), while
reinforcing Leveraged Finance and Capital Markets activities. Finally, in London, BES
Investimento led important Project Finance operations, thus maintaining the prominent position
achieved in previous years.
Asset Management
The BES Group is one of the leading providers of asset management services in Portugal.
International Activity
BES Group’s international activity is developed in markets with cultural and economic affinities
with Portugal, and its expansion is essentially oriented to the triangle formed by Spain, Angola
and Brazil. The Group’s international presence is mainly focused on specific areas where it
holds competitive advantages, exploiting markets and/or business areas with high growth
potential, leveraging on the experience obtained (and in some areas the leading position) in the
domestic market.
Faced with the increasing globalisation and openness of the financial markets, BES Group’s
international expansion also reflects the need to obtain the economies of scale and operating
efficiency gains afforded by a wider scope of operations. The Group’s strategy is to serve local
customers in target segments but also customers doing business on a trans-national scale.
30
Taxation in Portugal and Eligibility for the Portuguese Debt Securities Tax
Exemption Regime
The following is a summary of the material Portuguese and EU tax consequences with
respect to the Notes. The summary does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to any particular Noteholder, including tax
considerations that arise from rules of general application or that are generally assumed to be
known to Noteholders. This discussion is based on Portuguese law as it stands at the date of this
Placement Memorandum and is subject to any change in law that may take effect after such
date. Prospective investors in the Notes should consult their professional advisers with respect
to particular circumstances and the effects of state, local or foreign laws to which they may be
subject. Noteholders who are in doubt as to their tax position should consult their professional
advisers.
Portuguese Taxation
Economic benefits derived from interest, amortisation, reimbursement premiums and other
instances of remuneration arising from the Notes are designated as investment income for
Portuguese tax purposes.
General tax regime applicable on debt securities
According to the general tax provisions, investment income on the Notes paid to a holder
of Notes (who is the effective Noteholder thereof (the Noteholder)) considered to be resident for
tax purposes in the Portuguese territory or to a non-Portuguese resident having a permanent
establishment therein to which income is imputable, is subject to withholding tax at a rate of 20
per cent., except where the Noteholder is either a Portuguese resident financial institution (or a
non-resident financial institution having a permanent establishment in the Portuguese territory
to which income is imputable) or benefits from a reduction or a withholding tax exemption as
specified by current Portuguese tax law. In relation to Noteholders that are corporate entities
resident in the Portuguese territory (or non-residents having a permanent establishment therein
to which income is imputable), withholding tax is treated as a payment in advance and,
therefore, such Noteholders are entitled to claim appropriate credit against their final corporate
income tax liability. In relation to Noteholders that are individuals resident in the Portuguese
territory, withholding tax shall be considered as final, unless the individual elects to include the
income received on the Notes it in his taxable income, to be subject to tax at progressive rates of
up to 42 per cent. In this case, the tax withheld is deemed to be a payment on account of the
final tax due.
Investment income on the Notes paid to Noteholders considered as non-residents in the
Portuguese territory (and having no permanent establishment therein to which income is
imputable) is also subject to withholding tax at a flat rate of 20 per cent. This withholding tax
rate may be reduced in accordance with any applicable double taxation treaty signed by
Portugal, subject to compliance with certain procedures and certification requirements of the
Portuguese tax authorities, aimed at verifying the non-resident status and eligibility for the
respective tax treaty benefits.
Special debt securities tax regime
Pursuant to Decree-Law 193/2005, of 7 November 2005, as amended from time to time,
investment income paid to non-Portuguese resident Noteholders in respect of debt securities
registered with a centralised system recognised by the Portuguese Securities’ Code and
complementary legislation (such as the Central de Valores Mobiliários, managed by Interbolsa),
as well as capital gains derived from a sale or other disposition of such Notes, will be exempt
from Portuguese income tax provided the following requirements are met.
For the above-mentioned tax exemption to apply, Decree-Law 193/2005 requires that the
Noteholders are: (i) neither residents in the Portuguese territory (or have any registered or
deemed permanent establishment therein to which interest is imputable); (ii) nor residents in the
31
countries and territories included in the Portuguese “blacklist” (countries and territories listed in
Portaria 150/2004, of 13 February 2004), with the exception of central banks and governmental
agencies located in those blacklisted jurisdictions, and (iii) in the case of being legal entities,
provided that not more than 20 per cent. of its share capital is held, whether directly or
indirectly, by Portuguese residents.
For purposes of application at source of this tax exemption regime, Decree-Law 193/2005
requires completion of certain procedures and certifications. Under these procedures (which are
aimed at verifying the non-resident status of the Noteholder), the Noteholder is required to hold
the Notes through an account with one of the following entities: (i) a direct registered entity,
which is an entity affiliated with the clearing system recognised by the Portuguese Securities’
Code; (ii) an indirect registered entity, which, although not assuming the role of the “direct
registered entities”, is a client of the latter; or (iii) entities managing an international clearing
system, which are entities operating with the international market to clear and settle securities’
transactions. For purposes of the exemption granted under Decree-Law 193/2005, the
Portuguese Government has recognised both Euroclear Bank S.A./N.V. (Euroclear) and
Clearstream Banking, société anonyme (Clearstream) as entities managing an international
clearing system.
1. Domestic Cleared Notes – held through a direct or indirect registered entity
Direct registered entities are required, for the purposes of Decree-Law 193/2005, to register
the Noteholders in one of two accounts: (i) an exempt account or (ii) a non-exempt account.
Registration of the Notes in the exempt account is crucial for the exemption to apply. For
this purpose, the registration of the non-resident Noteholders in an exempt account, allowing
application of the exemption upfront, requires evidence of the non-resident status, to be
provided by the Noteholder to the direct registered entity (this will have to be made by no latter
than the second ICSD Business Day prior to the Relevant Date as defined in “Conditions of the
Notes” – Condition 6 (Taxation) as follows:
(a) if the Noteholder is a central bank, public institution, international body, credit or
financial institution, a pension fund or an insurance company, with its head office in any OECD
country or in a country with which the Republic of Portugal has entered into a double tax treaty,
the Noteholder will be required to prove its non-resident status by providing: (a) its tax
identification; or (b) a certificate issued by the entity responsible for its supervision or
registration, confirming the legal existence of the Noteholder and its head office; or (c) a
declaration of tax residence issued by the Noteholder itself, duly signed and authenticated, if the
Noteholder is a central bank, a public law entity taking part in the public administration (either
central, regional or peripheral, indirect or autonomous of the relevant country), or an
international body; or (d) proof of non- residence pursuant to the terms of paragraph (iii) below;
(b) if the Noteholder is an investment fund or other collective investment scheme domiciled
in any OECD country or in a country with which the Republic of Portugal has entered into a
double tax treaty, it shall make proof of its non-resident status by providing any of the following
documents: (a) a declaration issued by the entity responsible for its supervision or registration or
by the relevant tax authority, confirming its legal existence, domicile and law of incorporation;
or (b) proof of non-residence pursuant to the terms of paragraph (iii) below;
(c) other investors will be required to make proof of their non-resident status by way of: (a)
a certificate of residence or equivalent document issued by the relevant tax authorities; (b) a
document issued by the relevant Portuguese Consulate certifying residence abroad; or (c) a
document specifically issued by an official entity which forms part of the public administration
(either central, regional or peripheral, indirect or autonomous) of the relevant country. The
Noteholder must provide an original or a certified copy of such documents and, as a rule, if such
documents do not refer to a specific year and do not expire, they must have been issued within
the three years prior to the relevant payment or maturity dates or, if issued after the relevant
payment or maturity dates, within the following three months.
32
2. Internationally Cleared Notes – held through an entity managing an international
clearing system
If the Notes are registered in an account with an international clearing system (either with
Euroclear and Clearstream) and the management entity of such international clearing system
undertakes not to provide registration services in respect of the Notes to (i) Portuguese tax
residents that do not benefit from either an exemption or waiver of Portuguese withholding tax,
and (ii) to non-resident entities for tax purposes which do not benefit from the above Portuguese
income tax exemption, the proof required to benefit from the exemption will be made by no
later than the second ICSD Business Day prior to the Relevant Date as defined in “Conditions of
the Notes” – Condition 6 (Taxation) as follows:
(a) Through the presentation of a certificate, on a yearly basis, with the name of each
beneficial owner, address, tax payer number (if applicable), the identity of the securities, the
quantity held and also the reference to the legislation supporting the exemption or the waiver of
Portuguese withholding tax. The following corresponds to the wording and contents of the form
of certificate for exemption from Portuguese withholding tax on income from debt securities, as
contained in Order (Despacho) nº 4980/2006 (second series), published in the Portuguese
official diary, second series, nº 45, of 3 March 2006, issued by the Portuguese Minister of
Finance and Public Administration (currently, Ministro das Finanças e da Administração
Pública):
CERTIFICATE FOR EXEMPTION FROM PORTUGUESE WITHHOLDING TAX ON
INCOME ARISING FROM DEBT SECURITIES (PARAGRAPH 1 OF ARTICLE 17 OF THE
SPECIAL TAX REGIME APPROVED BY THE DECREE-LAW 193/2005, OF 7
NOVEMBER 2005)
The undersigned Participant hereby declares that he holds debt securities covered by the
special tax regime approved by Decree-Law 193/2005, of 7 November (the Securities), in the
following securities account number ………….. (the Account) with ……………. (name and
complete address of the international clearing system managing entity).
We will hold these Securities in our capacity of beneficial owner or in our capacity of
intermediary, holding Securities on behalf of one or more beneficial owners, including
ourselves, if applicable, all of whom are eligible for exemption at source from Portuguese
withholding tax according to Portuguese legislation.
1. We are:
Name: …………………………..
Residence for tax purposes (full address):……………………
Tax ID Number: ………………………………….
2. We hereby certify that, from the date hereof until the expiry date of this certificate:
A. We are the Beneficial Owner of the following Securities:
Security ISIN or
Common Code
Security description Nominal position
And we hereby declare that we are not liable to Portuguese withholding tax, in accordance
with the applicable legislation, indicated hereafter:
33
· Special Tax Regime approved by the Decree-Law 193/2005, of 7 November
· Art. 90 of CIRC (Corporate Income Tax Code) – Exemption from withholding tax
B. We are intermediaries of the following Securities:
Security ISIN or
Common Code
Security description Nominal position
3. We hereby undertake to provide the ……… (name of the international clearing system
managing entity) with a document proving the exemption of personal or corporate income tax
referred in the attached statement of beneficial ownership, whenever the beneficial owner is not
a central bank, public institution, international body, credit institution, financing company,
pension fund and insurance company resident in any OECD country or in a country with which
Portugal has concluded a Convention for the Avoidance of International Double Taxation, on
behalf of which we hold Portuguese debt securities in the Account.
4. We hereby undertake to notify the ……….. (name of the international clearing system
managing entity) promptly in the event that any information contained in this certificate
becomes untrue or incomplete.
5. We acknowledge that certification is required in connection with Portuguese law and
we irrevocably authorise ……………………… (name of the international clearing system
managing entity) and its Depositary to collect and forward this certificate or a copy hereof, any
attachments and any information relating to it, to the Portuguese authorities, including tax
authorities.
6. This certificate is valid for a period of twelve months as from the date of signature:
Place: _______________________ Date: ______________________________
___________________ ________
Authorised Signatory Name
_______________
Title/Position
___________________ ________
Authorised Signatory Name
34
_______________
Title/Position
Appendix
Statement of Beneficial Ownership
The undersigned beneficiary:
Name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Address: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax identification number: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Holding via the following financial intermediary:
Name of the financial intermediary: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
Account number: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The following securities:
Common Code /ISIN code: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment date: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nominal position: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Hereby declares that he/she/it is the beneficial owner of the above-mentioned securities
and nominal position at the payment date ___________ / ___________ / ___________ ; and
2. Hereby declares that he/she/it is not liable to withholding tax, in accordance with the
applicable legislation, indicated hereinafter (tick where applicable):
· Special Tax Regime approved by the Decree-Law 193/2005, of 7 November…………..
· Art. 90 of CIRC (Corporate Income Tax Code) – Exemption from withholding tax
35
· Art. 9 of CIRC – State, Autonomous Regions, local authorities, their associations
governed by public law and social security federations and institutions
· Art. 10 of CIRC – General Public Interest Companies, Charities and other nongovernmental
social entities; exemption by the Ministerial Regulation nº ……………..,
published in Diário da República……………..
· Art. 14 of EBF (Tax Incentives Statute) – Pension Funds and assimilated funds
· Art. 21 of EBF – Retirement Savings Funds (FPR), Education Savings Funds (FPE),
Retirement and Education Savings Funds (FPR/E)
· Art. 22-A of EBF – Venture Capital Investment Funds
· Art. 24 of EBF – Stock Savings Funds (FPA)Other legislation (indicate which)
This document is to be provided to the Portuguese tax authorities, if requested by the latter,
as foreseen in the Article 17 of the Special Tax Regime approved by the Decree-Law 193/2005,
of 7 November.
Authorised signatory:
Name:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Function: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signature: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
(b) Alternatively, through a yearly declaration that states that the beneficial owners are
exempt or not subject to withholding tax. This declaration is complemented with a disclosure
list, on each coupon payment date, of each beneficial owner’s identification, with the name of
each beneficial owner, address, tax payer number (if applicable), the identity of the securities,
the quantity held and also the reference to the legislation supporting the exemption or the waiver
of Portuguese withholding tax. The following corresponds to the wording and contents of the
form of statement for exemption from Portuguese withholding tax on income from debt
securities, as contained in Regulatory Notice (Aviso) nº 3714/2006 (second series), published in
the Portuguese official diary, second series, nº 59, of 23 March 2006, issued by the Portuguese
Secretary of State for Fiscal Affairs (currently, Secretário de Estado dos Assuntos Fiscais):
STATEMENT FOR EXEMPTION FROM PORTUGUESE WITHHOLDING TAX ON
INCOME ARISING FROM DEBT SECURITIES (PARAGRAPH 2 OF ARTICLE 17 OF THE
SPECIAL TAX REGIME APPROVED BY THE DECREE-LAW 193/2005, OF 7
NOVEMBER)
The undersigned Participant hereby declares that he holds or will hold debt securities
covered by the special tax regime approved by Decree-Law 193/2005, of 7 November (the
Securities), in the following securities account number ………….. (the Account) with
……………. (name and complete address of the international clearing system managing entity).
We hold or will hold these Securities in our capacity of beneficial owner or in our capacity
of intermediary, holding Securities on behalf of one or more beneficial owners, including
ourselves, if applicable, all of whom are eligible for exemption at source from Portuguese
withholding tax according to Portuguese legislation.
1. We are:
Name: …………………………..
Residence for tax purposes (full address):……………………
Tax ID Number: ………………………………….
2. We hereby undertake to provide the ……… (name of the international clearing system
managing entity) with a list of Beneficial Owners at each relevant record date containing the
name, residence for tax purposes, Tax Identification Number and nominal position of
Portuguese debt Securities for each Beneficial Owner, including ourselves if relevant, on behalf
of which we hold or will hold Portuguese debt securities in the Account.
3. We hereby undertake to notify the ……………(name of the international clearing
system managing entity) promptly in the event that any information contained in this certificate
becomes untrue or incomplete.
4. We acknowledge that certification is required in connection with Portuguese law and
we irrevocably authorise ……………………… (name of the international clearing system
managing entity) and its Depositary to collect and forward this certificate or a copy hereof, any
attachments and any information relating to it, to the Portuguese authorities, including tax
authorities.
5. This certificate is valid for a period of twelve months as from the date of signature:
Place: _______________________ Date: ______________________________
37
___________________ ________
Authorised Signatory Name
_______________
Title/Position
___________________ ________
Authorised Signatory Name
_______________
Title/Position
38
Appendix
List of Beneficial Owners
For:
Interest due __/___/____
Security code (ISIN or Common Code):_______________
Security description:_____________________
Securities Clearance Account Number:__________________
We certify that the above Portuguese debt securities are held on behalf of the following
Beneficial Owners:
Legal basis of the
exemption from withholding tax
Name Tax
identification
number
Residence
for tax
purposes
Quantity
of Securities
Code
(*)
Legislation(**)
(*) Indicate the legal basis of the exemption from withholding tax in accordance with the
following table:
Code Legal basis of the exemption
1 Special tax Regime approved by the Decree-Law 193/2005, 7 of November
2 Art. 90 of CIRC (Corporate Income Tax Code) – Exemption from withholding
tax
3 Art. 9 of CIRC – State, Autonomous Regions, local authorities, their
associations governed by public law and social security federations and institutions
4 Art. 10 of CIRC – General Public Interest Companies, Charities and other nongovernmental
social entities
5 Art. 14 of EBF (Tax Incentives Statute) – Pension Funds and assimilated funds
6 Art. 21 of EBF – Retirement Savings Funds (FPR), Education Savings Funds
(FPE), Retirement and Education Savings Funds (FPR/E)
7 Art. 22 – A of EBF – Venture Capital Investments Funds
8 Art. 24 of EBF – Stock Savings Funds (FPA)
9 Other legislation
(**) The fulfilment of this column is mandatory when the code “9” is indicated in the
previous column.
39
-*-
The two documents referred to in (a) or (b) above shall be provided by the participants (i.e.
the entities that operate in the international clearing system) to the direct registering entities,
through the international clearing system managing entity, and must take into account the total
accounts under their management relating to each Noteholder that is tax exempt or benefits from
the waiver of Portuguese withholding tax.
The international clearing system managing entity shall inform the direct registering entity
of the income paid to each participant for each security payment.
If the conditions for the exemption to apply are met, but, due to inaccurate or insufficient
information, tax was withheld, a special refund procedure is available under the special regime
approved by Decree-law 193/2005. The refund claim is to be submitted to the direct or indirect
register entity of the Instruments within 90 days from the date the withholding took place. A
special tax form for these purposes was approved by Order ("Despacho") no. 4980/2006 (2nd
series), published in the Portuguese official gazette, second series, n. 45, of 3 March 2006 issued
by the Portuguese Minister of Finance and Public Administration (currently "Ministro das
Finanças e da Administração Pública") and may be available at www.dgci.min-financas.pt.
The refund of withholding tax in other circumstances or after the above 90 day period is to
be claimed from the Portuguese tax authorities under the general procedures and within the
general deadlines.
The absence of evidence of non-residence in respect to any non-resident entity which
benefits from the above mentioned tax exemption regime shall result in the loss of the tax
exemption and consequent submission to the above applicable Portuguese general tax
provisions.
EU Savings Directive
Under EC Council Directive 2003/48/EC on the taxation of savings income, Member
States are required, from 1 July 2005, to provide to the tax authorities of another Member State
details of payments of interest (or similar income) paid by a person within its jurisdiction to an
individual resident in that other Member State. However, for a transitional period, Belgium,
Luxembourg and Austria are instead required (unless during that period they elect otherwise) to
operate a withholding system in relation to such payments (the ending of such transitional
period being dependent upon the conclusion of certain other agreements relating to information
exchange with certain other countries). A number of non-EU countries and certain dependent or
associated territories of certain Member States have agreed to adopt similar measures (either
provision of information or transitional withholding) in relation to payments made by a person
within its jurisdiction to, or collected by such a person for, an individual resident in a Member
State. In addition, the Member States have entered into reciprocal provision of information or
transitional withholding arrangements with certain of those dependent or associated territories in
relation to payments made by a person in a Member State to, or collected by such a person for,
an individual resident in one of those territories.
Portugal has implemented the above Directive on taxation of savings income into the
Portuguese law through Decree-Law no 62/2005, of 11 March, 2005, as amended by Law no
39-A/2005, of 29 July.
40
SUBSCRIPTION AND SALE
The Joint Lead Managers and the Senior Co-Lead Managers (together, the “Managers”)
have entered into a subscription agreement (the “Subscription Agreement”) dated 15 January
2009 with the Issuer. Under the Subscription Agreement, the Managers have agreed to subscribe
or procure subscribers for the Notes at the issue price of 99.797 per cent. of the principal
amount of Notes, less a commission of 0.15 per cent of the principal amount of the Notes. The
Issuer will also reimburse the Bookrunners in respect of certain of their expenses, and has
agreed to indemnify the Managers against certain liabilities incurred in connection with the
issue of the Notes. The Subscription Agreement may be terminated in certain circumstances
prior to payment to the Issuer.
United States
The Notes (which term for the purposes of this section "United States" shall, where
appropriate, include the Guarantee) have not been and will not be registered under the Securities
Act and may not be offered or sold within the United States or to, or for the account or benefit
of, U.S. persons except in certain transactions exempt from the registration requirements of the
Securities Act.
Each Manager has agreed that, except as permitted by the Subscription Agreement, it will
not offer, sell or deliver the Notes (a) as part of their distribution at any time or (b) otherwise
until 40 days after the later of the commencement of the offering and the Closing Date within
the United States or to, or for the account or benefit of, U.S. persons and that it will have sent to
each dealer to which it sells any Notes during the distribution compliance period a confirmation
or other notice setting forth the restrictions on offers and sales of the Notes within the United
States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the
meanings given to them by Regulation S under the Securities Act.
In addition, until 40 days after the commencement of the offering, an offer or sale of Notes
within the United States by any dealer that is not participating in the offering may violate the
registration requirements of the Securities Act.
United Kingdom
Each Manager has represented and agreed that:
(a) it has only communicated or caused to be communicated and will only communicate or
cause to be communicated an invitation or inducement to engage in investment activity (within
the meaning of Section 21 of the Financial Services and Markets Act (the “FSMA”)) received
by it in connection with the issue of the Notes in circumstances in which Section 21(1) of the
FSMA does not apply to the Issuer; and
(b) it has complied and will comply with all applicable provisions of the FSMA with respect
to anything done by it in relation to the Notes in, from or otherwise involving the United
Kingdom.
Portugal
Each Manager represents and agrees that it has not, directly or indirectly, advertised,
offered, distributed, submitted to an investment intentions gathering procedure or sold and will
not, directly or indirectly, advertise, offer, distribute, submit to an investment intentions
gathering procedure or sell the Notes other than in compliance with the Portuguese Securities
Code (Código dos Valores Mobiliários, the “Portuguese Securities Code”) and any applicable
regulations issued by Comissão do Mercado de Valores Mobiliários (Portuguese Securities
Market Commission, the “CMVM”).
41
General
Each Manager has acknowledged that no representation is made by the Issuer or itself that
any action has been or will be taken in any jurisdiction by the Issuer or itself that would permit a
public offering of the Notes, or possession or distribution of the Placement Memorandum or any
other material relating to the Issuer or the Notes in any country or jurisdiction where action for
that purpose is required. Accordingly, each Manager has undertaken that it will not, directly or
indirectly, offer or sell any Notes or distribute or publish any placement memorandum,
prospectus, form of application, advertisement or other document or information in any country
or jurisdiction except under circumstances that will, to the best of its knowledge and belief,
result in compliance with all applicable securities laws and regulations in each jurisdiction in
which it purchases, offers, sells or delivers Notes or has in its possession or distributes the
Placement Memorandum, in all cases at its own expense unless agreed otherwise.
42
GENERAL INFORMATION
Authorisation
The issue of the Notes was duly authorised by a resolution of the Executive Committee of
the Issuer dated 4 November 2008. The granting of the Guarantee was duly authorised by
decision (Despacho) n. 31179/2008, published on 4 December 2008, issued by the Secretary of
State for Treasury and Finance on 25 November 2008 and the renewal of the Guarantee -
enabling the issue of the Notes to occur within a two months period after 26 December 2008 -
was authorised by decision (Despacho) n. 2051, published on 15 January 2009, issued by the
Secretary of State for Treasury and Finance on 26 December 2008.
Listing
It is expected that listing of the Notes on Euronext will occur on or about 19 January 2009
subject to Euronext documentation requirements and procedures.
Clearing Systems
The Notes have been accepted for clearance through LCH.Clearnet, S.A., the clearance
system operated at Interbolsa. The ISIN Code for the Notes is PTBEMPOE0018 and the
Common Code is 040831843.
No significant change
There has been no significant change in the financial or trading position of the Issuer since
31 December 2007 and there has been no material adverse change in the financial position or
prospects of the Issuer since 31 December 2007.
Litigation
The Issuer is not involved in and, as far as the Issuer is aware, the Guarantor is not
involved in, any legal or arbitration proceedings (including any proceedings which are pending
or threatened of which the Issuer is aware) which may have or have had in the 12 months
preceding the date of this Placement Memorandum a significant effect on the financial position
of the Issuer.
Auditors
The auditors of the Issuer are KPMG & Associados, SROC S.A., who have audited the
Issuer's accounts in accordance with generally accepted auditing standards in the Republic of
Portugal for each of the two financial years ended on 31 December 2006 and 31 December
2007.
Documents available for inspection
So long as any of the Notes remains outstanding the Common Representative shall have
available for inspection during normal business hours the Agency and Payment Procedures, the
Common Representative Appointment Agreement and the Guarantee.
43
THE ISSUER
Banco Espírito Santo, S.A.
Avenida da Liberdade, 195
1250 – 142 Lisboa
Portugal
Tel. + 351 21 350 11 57
Fax. + 351 21 350 11 80
PAYING AGENT
Banco Espírito Santo, S.A.
Avenida da Liberdade, 195
1250 – 142 Lisboa
Portugal
Tel. + 351 21 350 11 57
Fax. + 351 21 350 11 80
COMMON REPRESENTATIVE
Vieira de Almeida & Associados – Sociedade de Advogados, R.L.
Av. Engº Duarte Pacheco, 26
1070-110 Lisboa
Portugal
Tel. + 351 21 311 34 00
Fax. + 351 21 352 22 39
LEGAL ADVISERS
To the Issuer as to Portuguese law
Vieira de Almeida & Associados – Sociedade de Advogados, R.L.
Av. Duarte Pacheco, 26
1070-110 Lisboa
Portugal
To the Managers
Uría Menéndez
Rua Castilho, 20, 6.º
1250 - 069 Lisboa
Portugal
44
AUDITORS
KPMG & Associados, SROC S.A.
Edifício Monumental
Avenida Praia da Vitória, 71-A, 11.º
1069-006 Lisboa
Portugal